ECO531 Chapter 6: Central Bank and Monetary Policy
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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?

  • 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?

  • Reserve Requirement
  • Discount Rate (correct)
  • Open Market Operation
  • 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?

    <p>Bank Negara Malaysia</p> Signup and view all the answers

    What is the primary role of the central bank in issuing currency?

    <p>Safeguarding the external value of the currency</p> Signup and view all the answers

    High employment is achieved when the economy uses all its available ________ more efficiently.

    <p>resources</p> Signup and view all the answers

    Price stability refers to a situation where there is no inflation or deflation in the economy.

    <p>True</p> Signup and view all the answers

    Match the monetary policy objective with its description:

    <p>High employment = Achieved when the economy maximizes output by efficiently using resources Interest rate stability = A situation with consistent interest rates to avoid uncertainty in the economy Stability of foreign exchange markets = Preventing extreme movements in the value of the country's currency in foreign exchange markets Price stability = Maintaining a situation without inflation or deflation in the economy</p> Signup and view all the answers

    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.

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