Sunday, July 12, 2009

Monetary Policy in the Circular Flow

wen the economy is operating at too low a level of income and when saving exceeds investment, in the absence of monetary policy, income will fall. expansionary monetary policy tries to channel more savings into investment so the fall in income stopped . it does so by increasing the available credit. lowering the interest rate, and increasing investment and hence income.
contractionary monetary policy is called for when savings is smaller than investment and the economy is operating at too high a level of income, causing inflationary pressures. in this case, monetary policy tries to restrict the demand for investment and consumer loans.

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