How to control monetary policy, Macroeconomics

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Q. How to control Monetary policy?

Remember that the money supply is equal to the money multiplier times the monetary base. We will presume that money multiplier is constant and because the monetary base is completely under the control of the central bank, central bank will control the money supply. 

Monetary policy = change in money supply 

Central bank actually has other monetary policy instrument apart from being able to conclude the money supply. The most significant one is the target interest rate for the overnight market. We won't consider the possibility of changing the target interest rate. Though we know that there is a negative relationship between target rate and money supply. Hence if you want to investigate the effect of an increase in target interest rate, you may just as well investigate a decrease in the money supply.


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