Political Economy Keynesian Economics Questions Medium
In Keynesian Economics, monetary policy refers to the actions taken by the central bank to control the money supply and interest rates in order to influence aggregate demand and stabilize the economy. The main objective of monetary policy in Keynesian Economics is to stimulate or restrain economic activity to achieve full employment and price stability.
In this framework, monetary policy works through various channels. Firstly, the central bank can influence the money supply by buying or selling government securities in the open market. When the central bank buys government securities, it injects money into the economy, increasing the money supply. This leads to lower interest rates, which encourages borrowing and investment, thereby stimulating aggregate demand. Conversely, when the central bank sells government securities, it reduces the money supply, leading to higher interest rates, which discourages borrowing and investment, thus restraining aggregate demand.
Secondly, the central bank can also adjust the reserve requirements for commercial banks. By increasing the reserve requirements, the central bank reduces the amount of money that banks can lend, thereby reducing the money supply and increasing interest rates. Conversely, by decreasing the reserve requirements, the central bank increases the amount of money that banks can lend, leading to an expansion of the money supply and lower interest rates.
Additionally, the central bank can directly influence interest rates through its control over the discount rate. The discount rate is the interest rate at which commercial banks can borrow from the central bank. By lowering the discount rate, the central bank encourages banks to borrow more, leading to increased lending and investment. Conversely, by raising the discount rate, the central bank discourages borrowing and investment.
Furthermore, monetary policy in Keynesian Economics also involves the use of open market operations, which refer to the buying and selling of government securities by the central bank. By purchasing government securities, the central bank injects money into the economy, stimulating aggregate demand. Conversely, by selling government securities, the central bank reduces the money supply, restraining aggregate demand.
Overall, in Keynesian Economics, monetary policy works by manipulating the money supply, interest rates, and credit availability to influence aggregate demand and stabilize the economy. By adjusting these variables, the central bank aims to achieve full employment and price stability, which are the key objectives of Keynesian Economics.