This video lesson graphically presents the three tools Central Banks have at their disposal for managing the level of aggregate demand in the economy. Through increasing or decreasing the money supply, a central bank has influence over the interest rates in a nation, and therefore over the level of investment and consumption among firms and households. To accomplish this, three tools are employed: The reserve requirement, the open market purchase or sale of government bonds, and the discount rate.
This lesson illustrates these three tools and explains the relative importance of each to monetary policy makers.
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!