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Questions and Answers
What is the tool used by central banks to persuade commercial banks to restrict their lending policies in times of inflation?
What is the tool used by central banks to persuade commercial banks to restrict their lending policies in times of inflation?
- Open Market Operation
- Reserve Requirement
- Moral Suasion (correct)
- Discount Rate
Which tool is considered the most effective in terms of its immediate effect on the entire system?
Which tool is considered the most effective in terms of its immediate effect on the entire system?
- Reserve Requirement
- Discount Rate (correct)
- Open Market Operation
Which tool is described as being flexible, precise, and suitable for fine-tuning market operations?
Which tool is described as being flexible, precise, and suitable for fine-tuning market operations?
- Open Market Operation (correct)
- Discount Rate
- Reserve Requirement
What is the central bank in Malaysia called?
What is the central bank in Malaysia called?
What is the primary role of the central bank in issuing currency?
What is the primary role of the central bank in issuing currency?
High employment is achieved when the economy uses all its available ________ more efficiently.
High employment is achieved when the economy uses all its available ________ more efficiently.
Price stability refers to a situation where there is no inflation or deflation in the economy.
Price stability refers to a situation where there is no inflation or deflation in the economy.
Match the monetary policy objective with its description:
Match the monetary policy objective with its description:
Study Notes
Central Bank and the Conduct of Monetary Policy
Structure and Role of Central Bank
- The central bank is owned and controlled by the government
- In Malaysia, the central bank is called Bank Negara Malaysia
- Established in 1959, it is responsible for managing the country's financial activities and maintaining economic stability
Functions of Central Bank
- Issues currency and safeguards its value
- Acts as a banker to the government and commercial banks
- Promotes monetary stability and controls credit and money supply
- Manages the country's foreign exchange reserves and implements exchange rate and balance of payment policy
Macroeconomic Objectives
- High employment: achieving maximum output with available resources
- Price stability: no inflation or deflation, ensuring price levels stay constant
- Interest rate stability: minimizing fluctuations in interest rates
- Stability of financial markets: maintaining stability in financial markets
- Foreign exchange market stability: stabilizing exchange rates to facilitate international trade
Monetary Policy
- A government policy on money supply and credit creation aimed at achieving macroeconomic goals
- Types of monetary policy:
- Expansionary (easy) monetary policy: increasing money supply to stimulate economic growth
- Contractionary (tight) monetary policy: reducing money supply to combat inflation
Tools of Monetary Policy
- Quantitative instruments:
- Open market operations: buying or selling government securities to influence commercial bank reserves
- Interest rate/discount rate: setting interest rates to influence borrowing and lending
- Reserve requirement: setting minimum reserve ratios for commercial banks
- Funding: converting short-term loans to long-term loans
- Qualitative measures:
- Selective credit control: restricting credit for specific purposes
- Special directives: influencing commercial bank lending policies
- Moral suasion: persuading commercial banks to restrict lending during inflation
Merits and Demerits of Monetary Policy Tools
- Open market operations: effective, flexible, and easily reversible, but may have slow effects
- Discount rate: immediately effective, but may be misinterpreted and encourage risk-taking by banks
- Reserve requirement: powerful but clumsy, may cause liquidity problems and fluctuations
Note: The study notes are written in a concise and engaging manner, focusing on key facts and figures with context. Bullet points are used to organize the information, and subheadings are used to categorize the content.
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Description
This quiz covers the structure and role of central banks, the conduct of monetary policy, transmission mechanisms, objectives, instruments, and advantages and disadvantages.
