Accommodating monetary policy Canadian mobile adult chat
The higher cash reserve ratio implies that the banks have to keep more cash reserve with the Central Bank.As a result, the cash reserves with the banks fall which force them to contract credit. Thus, IS-LM model can be used to show that reduction in money supply will cause a leftward shift in LM curve and will lead to the rise in interest rate and fall in the level of income. in money supply causes a shift in the LM curve; expansion in money supply shifts it to the right and decrease in money supply shifts it to the left.Suppose the economy is in grip of recession, the Government (through its Central Bank) adopts the expansionary monetary policy to lift the economy out of recession.At a lower interest there will be more investment by businessmen.More investment will cause aggregate demand and income to rise.
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Thus, it takes measures to increase the money supply in the economy.
The increase in money supply, state of liquidity preference or demand for money remaining unchanged, will lead to the fall in rate of interest.
It is worth noting that in the IS-LM model increase in national income by Y in Fig.
20.6 is less than EK which would occur in Keynes’ model.
In this way liquidity in the banking system can be reduced.