Chapter 14 is concerned with the basic analytic framework for macroeconomic policy. We explain why, in monetary policy, the government might wish to limit the growth of the money supply, and we show how the PSBR, the bank deposit multiplier and interest rates fit together in the framework for monetary policy (Diagram 14.1). We explain the discounted cash flow technique of investment appraisal so that the relationship between the rate of interest in the economy at large and the investment decision of individual enterprises can be appreciated (high interest rates are a disincentive to enterprise investment and this provides a powerful reason why the government would prefer to have lower interest rates).
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