Macroeconomics policymakers have two general tools in their kit to manage the level of aggregate demand in an economy. The first is fiscal policy, which involves government changing the levels of taxes and government spending to manage demand. Central banks engage in the second type of demand-management, known as monetary policy. By changing the supply of money available in a nation, central banks can raise and lower interest rates and thereby stimulate or contract the level of aggregate demand in the nation.
This video lesson introduces the money market, a model essential to understanding the workings of monetary policy. The supply and demand for money are introduced, and the basic effect of monetary policies are modeled in the simple money market diagram. In later videos, the various tools available to monetary policy makers will be explained and evaluated using the money market model.
After watching this video, consider reading and responding to the discussion questions for the following blog posts:
- “Why can’t the government just print more money?” – NOT such a silly question!
- The Federal Reserve and the tradeoff between unemployment and inflation
- Loanable Funds vs. Money Market: what’s the difference?
- From the Help Desk: the money multiplier and new money creation
- Little used monetary policy tool called into battle!
- Helicopter Ben and Monetary Policy: the cartoon version!
- Can Monetary policy cool China’s “overheating” economy?