RI H1 Economics Lecture Notes 8 Monetary Policy and Exchange Rate Policy

2019 Y6 H1 Economics Macroeconomics 59 RAFFLES INSTITUTION YEAR 6 H1 ECONOMICS 2019 Outline of Contents 1. Introduction – Monetary policy around the world 2. Definition of monetary policy 2.1 Types of Monetary Policy 3. Monetary Policy and Its Effectiveness 3.1 Using Expansionary Monetary Policy in a Recession and to reduce Cyclical Unemployment 3.2 Using Contractionary Monetary Policy to reduce Demand Pull Inflation 4. Exchange Rate Determination 4.1 Definition of Exchange Rate 4.2 Determination of Exchange Rate 4.3 Determination of Exchange Rate in a Freely Floating Exchange Rate System 4.4 Foreign Exchange Market Intervention by the Central Bank 5. Exchange Rate Policy and its Effectiveness 5.1 Devaluation of currency 5.2 Revaluation of currency 6. Monetary Policy in Singapore 6.1 Reasons for choice of Exchange Rate instead of Interest Rate 6.2 Conduct of Monetary Policy in Singapore 6.3 Limitations of Monetary Policy Centred on Exchange Rates 6.4 Monetary Policy does not work alone Appendix: Appendix1: Why is Singapore different – Neither fixed nor floating ER References Abel, Andrew B., & Bernanke, Ben S., Macroeconomics, 8th Edition, Addison-Wesley Lispey, et al., Economics, 9th Edition, Harper Collins Slavin, Stephen L., Macroeconomics, 11th Edition, McGraw-Hill Sloman, J., Economics, 8th Edition, Hertfordshire: Prentice Hall Singapore Department of Statistics www.singstat.gov.sg Monetary Authority of Singapore www.mas.gov.sg The Federal Reserve http://www.federalreserve.gov/ The Bank of England http://www.bankofengland.co.uk/monetarypolicy/ Lecture Objectives: - Explain how the AD/AS approach may be used to analyse the way monetary policies (interest rate and exchange rate) can affect the levels of employment, rate of inflation, economic growth and the balance of payments position. - Evaluate the effectiveness of these policies to address the economic aims in a country. - Have a good knowledge of recent economic trends and developments, with a focus on the Singapore economy. MACROECONOMIC POLICIES MONETARY POLICY & EXCHANGE RATE POLICY @dream

2019 Y6 H1 Economics Macroeconomics 60 1 Introduction - Monetary Policy around the world The financial news is always full of reports about interest rates. Below are some examples of such reports. From the above examples, it is evident that interest rate is an important variable in the economy as it has implications on the macroeconomic goals of the government. As such, interest rate has been employed by governments all over the world to influence t he performance of their economies. 2 Definition of Monetary Policy Monetary policy (MP) refers to a Central Bank’s actions to influence the availability and cost of money and credit, so as to achieve macroeconomic goals of sustained rate of economic growth, low inflation, full employment and favourable balance