What are the main tools of the monetary policy? What does quantitative easing mean? What does...

What are the main tools of the monetary policy? What does quantitative easing mean? What does "monetize the deficit mean? Why is it important in discussions of fiscal policy? Use an appropriate diagram to illustrate your answer.

Solutions

Expert Solution

Tools of monitary policy

Interest on Reserve
discount rate
Reserve requirements
Open market operations

Intrest on reserve : The reserves banks often hold extra funds on reserve

Discount rate : For the short term loan of commercial banks, the reserve bank sets special intrest rate

Reserve requirement : The deposit that must be in the form of cash by the bank and kept in vault

Open market operations : The buying and selling of things by Govt

QUANTITATIVE EASING

It is the arrival of new money to the money supply and issued by the central bank
It is an unconventional monetary policy
central bank purchases government securities from the market by means to reduce interest , thereby motivating money supply

MONETIZE THE DEFICT AND ITS IMPORTANCE IN FISCAL POLICY

The statement means that the govt prints the money inorder to pay their deficts
Defic could happen when the govt possibly spend more than they actually earns
with the issuing of money which indeed is more than what govt erans, there could possibly arise some situation where the money supply in the economy increases,
Hence the inflation pressure is prevailed
This is clearly why its related to fiscal policy which leads to inflation

Rahul Sunny answered 1 year ago

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