🏛️ Monetary Policy Basics 📺
🏦 A Simple Introduction [2020 Update] 📈
by Eric Smith
Video: "Level I CFA: Economics: Monetary and Fiscal Policy-Lecture 1"The following lectures provide a nice overview of this topic:
1.1) What is Money?Money denotes a standardized common medium of exchange used across an entire region.
1.2) Characteristics of MoneyMoney has the following features:
- Acceptance: It is typically readily accepted in a particular region.
- Known Value: Its value is well-known.
- Easily Divisible: Money is readily divisible into smaller units.
- Easy to Carry: It must be readily transportable.
- Counterfeiting Difficulty: It is difficult to create fraudlent currency.
1.3) Purposes of Money
- Medium of Exchange: It can be used to readily buy goods and services.
- Wealth Storage Mechanism: It provides individuals with an easy wealth storage method.
- Measure of Worth: It provides a convenient measur eof value.
2) Monetary Policy
2.1) What is Monetary Policy?Monetary Policy denotes the actions of the Central Bank directed towards influencing interest rate levels and money supply in an economy.
3.1) What is a Central Bank?The Central Bank is the monopoly currency supplier in a particular region, and acts as the banker to the government and the banker's bank.
The roles of the Central Bank include the following:
- Monopoly Currency Supplier: A Central Bank is the only organization with the authority to print bank notes or issue currency.
- Banker to the Government: The Central Bank provides banking services to the Government.
- Banker's Bank: The Central Bank provides banking services to other banks in an economy.
- Lender of Last Resort: As Central Banks can print money and issue coins, they are able to supply funds to borrowers that are facing shortages.
- Payments System Regulator: Oversees, standardizes and supervises a region's payments system.
- Monetary Policy Implementor: It takes action to control or influence the quantity of moeny and credit in an economy.
- Banking System Supervisor: The Central Bank oversees the banking system, and grants licenses to banks.
- Management of Forex (Foreign Currency) and Gold Reserves.
3.2) Fractional Reserve BankingFractional Reserve Banking denotes the system of banking in which banks only hold a fraction of total deposits with them as reserves, based on the premise that not all customers will want all their money back at the same time.
4) Interest Rates
4.1) Fischer EffectAccording to the Fischer Effect, the nominal interest rate is simply the sum of the real interest rate and expected inflation.