Answer to Question #93619 in Microeconomics for Musbahu Ibrahim Ahmad

Question

Compare and contrast between convenotional and unconventional Monetary policy

Answer 1

Central banks use both policies to affect, interest rates, money supply, and output. Conventional policies are used to tighten money supply while unconventional apply to expand the supply of money. For instance, let's assume inflation has reached dangerous levels. The central bank of such a country would enact restrictive monetary measures to tighten the supply of money. Raising high rates of interest increases borrowing costs, reduces cash demand making money more expensive. However, when the counties economy goes into a deep recession, the unconventional policies apply. The central banks expand the supply of money through open market operations (OMO). Therefore, unconventional policies work in reverse of conventional policies (Chen, 2014).

Reference

Chen, J. (2014). Conventional and unconventional monetary policy in a DSGE model with inter-bank market friction(Doctoral dissertation, University of St Andrews).