Monetary and Fiscal Policy

Central banks act systematically to changes in economic conditions and set interest rates
Money demand fluctuates because income fluctuates
If money demand is too high interest rates are increased to lower it and if too low interest rates are lowered to increase it again.
This helps to keep the nominal money stock on a specified task and stabilises aggregate demand for output.
Taylor Rule
This implies that banks don't follow the monetary target but the intermediate targets of inflation and output.
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