Monetary Policy Cheat Sheet PDF

MONETARY POLICY CHEAT SHEET Problem: Recession Policy: Expansionary Monetary Policy Tools: Reserve Ratios ; Policy Rates ; OMOs- Buy Bonds Category Action/Effect Explanation Problem Recession Decreased GDP and increased unemployment. Goal for...

MONETARY POLICY CHEAT SHEET Problem: Recession Policy: Expansionary Monetary Policy Tools: Reserve Ratios ; Policy Rates ; OMOs- Buy Bonds Category Action/Effect Explanation Problem Recession Decreased GDP and increased unemployment. Goal for Aggregate Increase Higher demand can kickstart economic recovery Demand Expansionary To increase the money supply and lower interest Policy monetary policy rates to encourage borrowing and investment. Lower reserve ratios Banks left with more money to loan (CRR, SLR) Lower policy rates Borrowing from RBI becomes cheaper for banks. Tools (Repo Rate etc) Hence they with give more loans Buy bonds (Open Govt directly increases money supply in the economy Market Operations) Money with Lower reserve requirements and interest rates Increase Banks for provide banks with more resources to offer loans. Loans Money Buying bonds injects money into the economy Increase Supply Banks also offer more loans Bank Lower policy rates lead to lower lending rates, Interest Decrease making loans cheaper. Rates Bond Buying bonds by RBI raises their price due to higher Increase Prices demand. Bond An inverse relationship to bond prices; as prices go Decrease Yield up, yields go down. 1 Category Action/Effect Explanation Consumption Lower interest rates and greater loan availability and Increase Investment boost spending and capital investments. Capital Formation More investment in capital goods and in the Increase infrastructure due to easier financing conditions. Economy Aggregate Increased consumption and investment raise Increase Demand overall economic demand. Enhanced aggregate demand leads to higher GDP Increase output and economic growth. Price Increased money supply and demand can lead Increase Levels inflationary pressures. A byproduct of increased economic activity and Inflation Increase money supply. Unemplo Decrease Economic stimulation creates jobs. yment Forex Demand for Rupees Low Interest Rates/Low bond yields will not Market will decrease attract foreign investors Exchange Rupee will depreciate Low demand for Rupees Rate Net A weaker currency makes exports cheaper and Exports Increase more competitive abroad, potentially increasing (X-M) them. GDP will increase Benefits of Expansionary Policy Unemployment will decrease Side Effects of Expansionary Inflation will increase Policy Rupee will depreciate 2 MONETARY POLICY CHEAT SHEET Problem : Inflation Policy: Contractionary Monetary Policy Tools: Reserve Ratios ; Policy Rates ; OMOs- Sell Bonds Category Action/Effect Explanation Excessive inflation erodes purchasing power and can Problem High inflation destabilize the economy. Goal for Aggregate Decrease Lowering demand can help moderate inflation Demand Contractionary To reduce the money supply and increasing interest Policy monetary policy rates to dampen economic activity. Increase reserve ratios Banks left with less money to loan (CRR, SLR) Increase policy rates Borrowing from RBI becomes expensive for banks. Tools (Repo Rates etc) Hence they with give less loans Sell bonds (Open Govt directly decreases money supply in the Market Operations) economy Money Higher reserve requirements and interest rates with Banks Decrease reduce the funds banks have available for lending. for Loans Money Selling bonds withdraws money from the economy, Decrease Supply also high interest rates makes loans expensive Bank Higher policy rates lead to increased lending rates, Interest Increase making loans more expensive. Rates Bond Selling bonds increases supply, leading to lower Decrease Prices prices due to higher availability. An inverse relationship to bond prices; as prices Bond Yield Increase decrease, yields increase. 3 Category Action/Effect Explanation Consumption Higher interest rates and reduced liquidity lead and Decrease to lower consumer spending and business Investment investment. Capital Fewer investments in capital goods and Formation Decrease infrastructure due to more restrictive financing in the Economy conditions. Aggregate Reduced consumption and investment lower Demand Decrease overall economic demand. Might decrease or Lower aggregate demand can slow GDP growth GDP grow more slowly or cause a temporary contraction. Price Stabilize or decrease Lower demand can help stabilize or reduce prices Levels Reduced inflationary pressures due to slowing Inflation Decrease economic activity. Unemplo Less economic activity can lead to increased Increase yment unemployment. Forex Demand for Rupees High Interest Rates/High bond yields will attract Market will increase foreign investors Exchange Appreciation High demand for Rupees Rate Net A stronger currency makes exports more Exports Decrease expensive and imports cheaper, potentially (X-M) decreasing net exports. Benefit of Contractionary Policy Inflation will decrease Side Effects of Contractionary Growth Rate will decrease Policy Unemployment will increase 4 FISCAL POLICY CHEAT SHEET Problem: Recession Policy: Expansionary Fiscal Policy Tools: Govt Spending; Tax Rates Category Action/Effect Explanation Problem Economic downturn Downturn signals a contraction in economic activity, with decreased GDP necessitating government intervention. and increased unemployment. (Recession) Goal for Increase Increasing demand can help kickstart economic Aggregate recovery and lower unemployment rates. Demand Policy Expansionary fiscal Designed to increase money flow in the economy. policy Tools Increase government Directly boosts economic activity by increasing spending government purchases and investments. Decrease taxes Increases disposable income, enabling higher consumer and business spending. Aggregate Increase Money is injected into the economy/More money in Demand consumers’ hands GDP Increase More spending and investment lead to increased production and services, growing the GDP. Price Level Higher Increased demand can lead to higher prices if supply doesn't keep up. Inflation Increase Increase in prices levels due to greater demand and spending. Unemploy Decrease New jobs arise from increased production and services ment needed to meet the boosted demand. 5  Category Action/Effect Explanation Budget Deficit Higher government spending and lower tax revenue, Deficit widening the deficit. /Surplus National Increase Increased borrowing to cover deficits adds to the Debt national debt. Loanable Demand for funds- Increased government borrowing can reduce the Funds Increase availability of loans for the private sector. Supply of funds- Decrease because Govt will drain the funds Money Higher demand for This will affect the Interest Rates Market money due to increased borrowing by Govt Interest Increase High demand for funds and low supply of funds will Rate drive up the Interest Rate. Private Decrease Less availability of funds for Private Sector will lead to Investment Crowding Out. Foreign Demand for Rupees High Interest Rates becomes lucrative investment for Exchange will increase Foreign Investors. Market Exchange Rupee will appreciate Becuse of high demand for Rupees Rate Net Exports Decrease Appreciation of Rupees makes our products more expensive. So exports will decrease. Benefits of Expansionary Policy GDP will increase Unemployment will decrease Inflation Side Effects of Expansionary Policy Crowding Out Net Exports will decrease 6 FISCAL POLICY CHEAT SHEET Problem:Inflation/Fiscal Deficit Policy: Contractionary Fiscal Policy Tools: Govt Spending; Tax Rates Category Action/Effect Explanation High inflation/ High inflation erodes purchasing power and can Problem Fiscal Deficit destabilize the economy Goal for Reducing demand can help cool down the economy Aggregate Decrease and control inflation Demand Contractionary Policy Aimed at reducing the money supply Fiscal Policy Decrease Reduces government’s direct economic impact by government lowering expenditures. spending Tools Decreases disposable income Increase taxes for consumers and businesses. Aggregate Reduced money supply in the economy/Less money in Decrease Demand consumers’ hands Lower spending and investment might reduce GDP Decrease GDP growth or even shrink GDP Less demand leads to stabilized or reduced Price Level Lower prices Decrease in price levels due to less demand Inflation Decrease and spending Unemploy Reduced economic activity can lead to higher Increase ment unemployment rates 7  Category Action/Effect Explanation Budget Less Govt Expenditure and higher tax revenue may Deficit Surplus lead to surplus /Surplus National Reduced need for borrowing could slow the growth of Decrease Debt or reduce national debt. Increase in supply of Loanable funds as decrease in More funds available for private sector borrowing Funds government borrowing Lower demand for Money money due to Could lead to lower interest rates Market reduced borrowing by Govt Interest Low demand for funds due to decreased Govt Decrease Rate borrowing Private Availability of funds at lower Interest Increase Investment Rates will lead to Crowding In Foreign Demand for Rupees Low Interest Rates will not attract Foreign Exchange will decrease Investors Market Exchange Rupee will depreciate Because of low demand for Rupees. Rate Depreciation of Rupees makes our products Net Exports Increase more competitive in International market. So Exports will rise. Inflation will decrease Benefits of Contractionary Policy Budget Deficit will decrease Unemployment will rise Side Effects of Contractionary Policy Crowding In Net Exports will increase Created by: Ketan TG: https://t.me/ketanomyOfficial Author of ‘Indian Economy Handbook’ X: https://twitter.com/Ketanomy 8 EXCHANGE RATE CHEAT SHEET Factors Appreciation Depreciation Higher interest rates Lower interest rates reduce Interest increase demand for the demand for the currency as Rates currency as investors seek investors seek higher yields higher returns elsewhere Lower inflation rates Higher inflation rates erode Inflation increase purchasing power purchasing power and Rates and attractiveness of the decrease attractiveness of currency the currency Strong economic growth Weak economic growth Economic attracts investment and reduces investment and Growth increases demand for the decreases demand for the currency currency Trade surplus increases Trade deficit increases Trade demand for the currency demand for foreign currency Balance as exports require its to finance imports purchase Positive speculation on the Negative speculation on the Speculation currency increases currency reduces demand demand Political stability attracts Political instability creates Political investment and increases uncertainty and decreases Stability confidence confidence Central bank buying of its Central Bank Central bank selling of its currency increases Intervention currency decreases demand demand 9 Factors Appreciation Depreciation Foreign Direct Inflows of FDI increase Outflows of FDI reduce demand Investment demand for the currency for the currency (FDI) Market Sentiment Positive sentiment increases Negative sentiment decreases and demand for the currency demand for the currency Confidence Global Safe-haven status during Negative impacts or Events and global turmoil increases uncertainties lead to Geopolitical demand for the currency decreased demand Risks Relative Strength of Stronger relative performance Weaker relative performance Other compared to other currencies compared to other currencies Currencies Lower government debt levels Higher government debt levels Government signal fiscal responsibility raise concerns about fiscal Debt Level and increase demand for the sustainability currency Capital Inflows of capital increase Outflows of capital reduce Flows demand for the currency demand for the currency Policies perceived as Pro-growth policies increase Government detrimental to the economy confidence and demand for Policies decrease confidence and the currency demand Created by: Ketan TG: https://t.me/ketanomyOfficial Author of ‘Indian Economy Handbook’ X: https://twitter.com/Ketanomy 10