Economics · Unit 3: Macroeconomics

EC3.5 — Demand management (demand-side policies), monetary policy

Economics · SL / HL · syllabus-mapped notes

1. EC3.5.1

   Monetary policy

   Define monetary policy as the central bank’s control of the money supply and interest rates.

2. EC3.5.2

   Goals of monetary policy

   Explain the goals of monetary policy, from low and stable inflation to a stable environment for long-term growth.

3. EC3.5.3

   The process of money creation by commercial banks

   Explain how commercial banks create money through lending.

4. EC3.5.4

   Tools of monetary policy

   Explain the tools of monetary policy, open market operations, reserve requirements and the central bank’s lending rate.

5. EC3.5.5

   Demand and supply of money, determination of equilibrium interest rates

   Explain how the demand for and supply of money determine the equilibrium interest rate.

6. EC3.5.6

   Real versus nominal interest rates

   Distinguish real from nominal interest rates, and calculate the real rate.

7. EC3.5.7

   Expansionary and contractionary monetary policies to close deflationary/recessionary and inflationary gaps

   Evaluate how expansionary and contractionary monetary policy close a deflationary or inflationary gap.

8. EC3.5.8

   Effectiveness of monetary policy

   Evaluate monetary policy against its constraints and strengths, and how well it promotes growth, low unemployment and stable inflation.