Question

which of the tools of monetary policy do you think are efficient and why

Answer 1

Monetary Policy tools are exercised by the central bank of a country for controlling the money supply and maintaining the economic growth stability of a country's economy. The most important role of monetary policy is controlling inflation. The policies can be expansionary or contractionary.

Following are important tools of monetary policy:

A) Reserve Requirements :- Central bank can change its reserve requirement from time to time in order to achieve the desired objective. This is an imp tool as its effect can be seen in short term. For decreasing inflation Fed can increase the reserve requirement so that money supply in the economy is reduced and for increasing money supply vice versa.
B) Open Market Operations :- Fed uses it to buy and sell treasury's. This is done to manage the money supply in the economy. For controlling Fed sells the treasury whereas for increasing vice versa. It is an effective tool as it can address the situation in a short term.
C) Fed Funds Rate:- It is the rate banks use for lending there excess funds to each other. Banks also base their lending rates on this basis. Thus it is an effective tool.