Question

1. what are the players of the loanable funds market? what id the P & Q of this MKT?

2. what is the Fiscal policy ? Monetary policy?

3. How the central bank conduct the monetary policy ( Tools to affect MS and i ) ?

Answer 1

Question 1

The loanable fund market is the market for borrowers and savers. The borrowers demand the loanable fund and savers supply the loanable fund. The equilibrium in the market where borrowing is equal to the savings in the market. It will create an equilibrium rate of interest. The P in this market is the rate of interest, Q is the total quantity of loanable funds. It is illustrated in the given figure,

Question 2

The fiscal policy is the policy of the central government of the country. It is the government policy of taxation and spending. The government adjust taxation and spending at the time of both inflation and deflation. It makes the economy stable over the period.

Monetary policy is the policy of the central bank of the country. It manages both money supply and rate of interest to achieve the objectives of inflation, economic growth and liquidity in the economy.

Question 3

The central bank conduct monetary policy by using three tools. That is the open market operation, reserve requirement and discount rate. It is explained below,

Open market operation

The open market operation is the buying and selling of government securities. This will change the reserve amount of the member banks. Higher the reserve the bank can sell less. At the time of inflation, the central bank sells securities and it will reduce the money supply in the economy. Whereas, at the time of deflation, the central buys the securities which will increase the money supply in the economy.

Reserve requirements

The central bank owns regulation on how much money wants to keep the member banks. The central bank sets the reserve requirement ratio. At the time of inflation, the central bank hikes the reserve requirement. It will reduce the ability of member banks to give loan to the public. It will reduce the money supply in the economy. On the other hand, at the time of deflation, the central bank reduces the reserve requirement. It enhances the ability of member banks to give loans to the public. It will increase the money supply in the economy.

Discount rate

The discount rate is the rate of interest charged by the central bank to give loans to the member countries. At the time of inflation, the central bank increases the discount rate and at the time of deflation reduces the rate.