Question

1. Discuss the objectives of monetary policy in Kenya.
2. Discuss how monetary policy instruments have been used to achieve monetary policy objectives.

           

Answer 1

1) MONETARY POLICY:

Monetary policy is an economic policy that manages the size and growth rate of the money supply in an economy. It is a powerful tool to regulate macroeconomic variables such as inflation and unemployment.

The objectives of monetary policy in kenya:

The Central Bank of Kenya's principal objective is formulation and implementaion of monetary policy directed to achieving and maintaining stability in the general level of prices. The aim is to achieve stable prices, measures by a low and stable inflation, and to sustain the value of the Kenya shelling.

2) The federal Reserve's three instruments of monetary policy are open market operations, reserve requirements and the discount rate.

In open market operations they buy and sell government bonds and other securities from member banks. This action changes the reserve amount the bank have on hand. A higher reserve means banks can lend less. That's contractionary policy. In the United States, the fed sells Treasurys to member banks.

The second instrument is reserve requirements, in which the central banks tell their members how much money they must keep on reserve each night. Not everyone needs all their money each day, so it is safe for the bank to send most of it out. That way, they have enough cash on hand to meet most demands for redemption. Previously, this reserve requirement has been 10%. However, effective March 26, 2020, the fed has reduced the reserve requirement to zero.

The third instrument is the discount rate. That's how much a central bank changes members to borrow funds from its discount window. It raises the discount rate to discourage banks from borrowing. That action reduces liquidity and slows the economy. By lowering the discount rate, it encourages borrowing. That increases liquidity and boosts growth.

These are the instruments that help achieve monetary policy objectives.