Goods market

• Increase in nominal income

• 
  M^d shifts to the right and M^s
  

• 
  → Interest rates move higher
  

• 
  Increase in M^s => shifts to the
  

• 
  → Interest rates move lower
  
• 
  This is what is happening right now since Deposit Rates>Loan demand
  

• 
  The Central Bank injects or sucks out money from the system by
  

• Expansionary Monetary Policy

• 
  Injection of liquidity: Buys Govt bonds and broadly fixed securities from financial market players like Banks, FIs, Pension fund (from household savings), Corporate treasuries (cash surplus) etc. and releases rupees.
  
• 
  These bonds get added to the CB balance sheet as ‘assets’
  

• 
  The money that these players receive as payment for selling the bonds is the currency that the CB creates in the system which added to the CB ‘liabilities’
  

• Contractionary monetary policy

• 
  CB sells Govt bonds to market players for the amount of money
  

• 
  On the CB balance sheet, that much amount of assets get reduced
  

‘liability’ does down

• 
  This way by selling Govt bonds to these players, the Central Bank is
  

• 
  Open market operations (OMO) because they take place in the
  

• Explain what happens in Contractionary monetary policy

Monetary aggregates –

• 
  3 main types of money in fiat money economy:
  

1. 
   Currency
   
2. 
   Bank deposits
   
3. 
   Central bank reserves
   

• 
  Each represents an IOU from one sector of the economy to
  

1. 
   Central Bank
   
2. 
   Commercial Banks
   
3. 
   Private HHs & companies
   

• 
  Money in the modern economy is in the form of bank deposits,
  

• 
  To formally measure the money circulating in economy, Central Banks compile monetary aggregates
  

• 
  2 broad categories of monetary aggregates
  

1. 
   Base Money
   
2. 
   Broad Money