Confusing monetary policy
Hey there, there are two concepts that are driving me crazy that I can’t just figure out. Anyone know?
1. I am seeing sources that state when a central bank engages in monetary policy and buys securities in open mark relations this in turn increases the reserve requirement. If the reserve requirement goes up this reduces money supply and therefore increases interest rates according to the LM curve of demand-which is contractionary. However, I am getting questions wrong on mocks where it states when a bank purchase securities this raises the prices of securities such as bonds, therefore lowering interest rates contributing to an expansionary monetary policy. What am I missing here?
2. According the IS curve of demand, when rates go up, investment goes down. However, according to demand of money supply, there is an inverse relationship where when rates go up, investors want that higher yield in investment and their demand for money goes down. What gives?
Thank you to anyone that can explain and good luck to all tomorrow!
Dave De Nicola
Sent from my iPad
Study together. Pass together.
Join the world's largest online community of CFA, CAIA and FRM candidates.