Question

Please complete a 1 page summary on monetary policy

Answer 1

Answer) Monetary policy is a central bank's policies and information that regulate the money supply. The monetary policy main goals are to control inflation. The central bank tries to attain this by adjusting the interest rate, buying or selling government bonds, regulating foreign exchange rates, and altering the volume of money banks is expected to maintain as reserves.

Kinds of Monetary Policy

1. Central banks use contractionary monetary policy to lessen inflation. They decrease the money supply by constraining the volume of money banks can lend. The banks demand a higher interest rate, making loans more costly. Fewer businesses and individuals borrow, hindering growth.

2. Central banks use expansionary monetary policy to decrease unemployment and prevent a recession. They boost liquidity by giving banks extra money to lend. When banks lower interest rates, it makes loans cheaper. Businesses borrow more to purchase equipment, hire employees, and broaden their operations. Individuals obtain more to buy more homes, cars, and appliances. That improves demand and stimulates economic expansion.

Monetary Policy Tools

1. open market operations:- They purchase and sell government bonds and other securities from member banks. This effort alters the reserve amount the banks have on hand. An increased reserve means banks can lend less. That's a contractionary policy.

2. Reserve requirement:- in which the central banks give an order on how much money they must hold as reserve each night. Not everyone needs all their money the same day, so it is safe for the banks to provide loans.

When a central bank wants to constrain liquidity, it raises the reserve requirement. That gives banks limited money to lend. When it wants to enhance liquidity, it reduces the requirement.

3. Discount rate:- Discount rates refer to how much a central bank charges members to obtain funds from its discount window. It increases the discount rate to dissuade banks from borrowing. That action lessens liquidity and hinders the economy. By lessening the discount rate, it stimulates borrowing. That improves liquidity and stimulates growth.

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