Question

QUESTION 5

Case Study (Monetary Policy)

Lima, 9 October 2015: Top financiers have told the International Monetary Fund‟s meeting
that with a slowing China growth, central banks in a low-growth world with over-leveraged
and commodity-dependent economies have little room for error.
Since the global financial crisis, although banks in industrial nations have USD 7 Trillion
(RM 29.3 trillion) through quantitative easing, the world is in a „new mediocre growth‟
pattern. Quantitative easing is the introduction of new money into the money supply by a
central bank.
Governments aim to improve tax collection via punishing companies that arbitrage tax
regimes. Moreover, the Bank of Japan extended its money printing program (i.e quantitative
easing) as it stares down the barrel of fifth year of recession. The European Central bank is
also expected to extend quantitative easing while the US Federal Reserve and The Bank of
England are closest to raising rates this year, despite inflation targets being far out of reach.
In view of these, the Fed, the Japanese and the European central Banks were urged by the
IMF to wait for more sign of recovery before tightening.
Source: Adapted from malay Mail Online, 2015

QUESTIONs:

a. Define monetary policy.

b. Should the central bank implement expansionary or contractionary monetary policy to control recession?

c. Based on the article, state the instrument used by central bank to control recession.


d. Suggest three other instruments under monetary policy which could be used to reduce
recession.

Answer 1

(A) monetary policy is run by central bank of country in which central bank manages, controls, issues currency in the economy as per the economic conditions. central bank increase and decrease the money supply in the economy to fight with recession and inflation respectively. Apart from this central bank guide the behavior of commercial bank and through them manage the currency in the economy. in monetary policy central bank follow quantitative easing and quantitative restriction policy to combat the economic situation. central bank also decides CRR and SLR to control the money creation process of commercial bank and decrease/ increase the money supply in the economy.

(B) Central bank should implement expansionary monetary policy to control recession. while following this policy central bank decrease the CRR (cash reserve ratio) , SLR(statutory liquidity ratio) , repo rate, reverse repo rate and purchase the securities from open market so that money supply increase in economy and economic activities like consumption , saving , investment can increase. during recession every economic activity reduces so in order to resume these activities central bank follow expansionary monetary policy.

(C) central bank follows the Quantitative easing that is the introduction of new money into the money supply in the economy. printing new currency will increase the money supply in the economy and give pace to economic activities. central bank increase the monetary base in the economy so that investment, employment , income generation and demand may be continue to exist and people increase their expenditure to bring the economy on earlier platform.

(D) three other instruments are as follows

1. Reduce CRR and SLR so that commercial bank lending capacity can increase in the economy and economy start their priority based activities.

2. Open market operation in which bank purchase the securities so that money supply through commercial bank can increase in the economy and same economic activities remain stable.

3. reduce Repo rate and reverse repo rate. during the recession when economic activities down the ground then to resume them bank decreasing their lending interest rate to customer and between the central bank so that most of the money rotate in the hands of customer and these rotation increase the spending capacity of people and as we know expenditure of one person become the income of others so money changes hands and money supply increase in the economy and new ventures, employment opportunities increase and income as well.