Question

1. How do central banks manage interest rates in your country and one other country of your choice? What consequences for output fluctuations can the central bank expect from targeting interest rates?

2. Would a high (in the limit, 100 %) reserve requirement imposed on banks strengthen central bank control over the money supply? If so, why do central banks never impose very high reserve requirements?

Answer 1

1)Central Bank managing interest rates in my country or in any other country is by contractionary or expansionary monetary policy. The interest rates may vary from country to country but the policy which is used to control interest rates is always monetary policy.

Most of the output fluctuations because of this policy is that money supply, Investment in Business , price level in the country, inflation rate, Consumer savings in Financial institution and Business loan taking lenders. This are the things which can be expected from targeting interest rate.

2) Yes Central Bank can have more control over money supply by rising interest rates but the problem is that when people should have more money to spend in the Economy if there is high reserve requirement than the growth of the economy will be effected.

Even due to high reserve requirement the banks may not be able to run so they have to lend money for the survival of banking industry and the Economy. So Central Bank always keeps reserve requirement depending on the economic situation.