Restrictive and Expanionary Monetary Policy

Restrictive monetary policy:

• Sell Treasuries
• Raise discount rate
• Raise required reservation.

In short-run

• If the economy is overheating, the Fed decreases money supply by selling securities => higher interest rates => lower investment, consumer spending and exports => lower output and rise in unemployment.

In long-run

• If beyond full employment => decrease inflation
• At or below full employment => recession
  
  

Expansionary monetary policy

• Buy Treasuries
• Lower discount rate
• Lower required reserve ratio

In short-run

• In a recession, Fed increases money supply by buying securities => lower interest rates => less expensive current consumption and investment, depreciate dollars, higher assets price eg. stocks bonds house higher => higher wealth => higher investment, consumer spending and exports => higher output and fall in unemployment.

In long-run

• If at full employment, increase output and employment => higher price bring economy back=>inflation
• below full employment => Increase output and employment
  
  
  

Expectations of Monetary Policy
Expectations impact perceptions about inflation and the timing of those perceptions.
The effectiveness of expansionary monetary and fiscal policy with regards to increases in output and employment is reduced by expectations.

Monetarist’s view:
As change in Money supply will influence price and output, the best monetary plicy is one of steady, preditable money growth. and discretary monetary policy not be used to moderate the price & output fluctuation.
Time lag: 5-36 mths