Podcast
Questions and Answers
Why do commercial banks re-discount commercial papers with the central bank?
Why do commercial banks re-discount commercial papers with the central bank?
What is the effect on the money supply when the central bank raises the re-discount rate?
What is the effect on the money supply when the central bank raises the re-discount rate?
Why do commercial banks raise their discount rate for commercial papers when the central bank raises the re-discount rate?
Why do commercial banks raise their discount rate for commercial papers when the central bank raises the re-discount rate?
What is the effect of reducing the re-discount rate on the money supply?
What is the effect of reducing the re-discount rate on the money supply?
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What is the objective of open market operations when the economy is in recession?
What is the objective of open market operations when the economy is in recession?
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What is the effect of the central bank buying government securities and bonds on the market?
What is the effect of the central bank buying government securities and bonds on the market?
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What is the effect of open market operations on aggregate demand?
What is the effect of open market operations on aggregate demand?
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Why do commercial banks increase their lending capacity when the central bank reduces the re-discount rate?
Why do commercial banks increase their lending capacity when the central bank reduces the re-discount rate?
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What is the primary goal of monetary policy?
What is the primary goal of monetary policy?
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What is the purpose of the required reserve ratio?
What is the purpose of the required reserve ratio?
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What happens when the central bank reduces the required reserve ratio?
What happens when the central bank reduces the required reserve ratio?
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What is the rediscount rate?
What is the rediscount rate?
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What is the goal of contractionary monetary policy?
What is the goal of contractionary monetary policy?
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What is the effect of increasing the required reserve ratio on commercial banks?
What is the effect of increasing the required reserve ratio on commercial banks?
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What is the purpose of open market operations?
What is the purpose of open market operations?
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What is the result of expansionary monetary policy?
What is the result of expansionary monetary policy?
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Study Notes
Monetary Policy
- Monetary policy is a set of actions taken by the central bank to adjust the money supply in proportion to the desired level of economic activity to achieve economic objectives.
Goals of Monetary Policy
- Achieve price stability
- Achieve full employment
- Achieve high growth rates
- Maintain stability of financial markets
- Stabilize the interest rate
- Achieve exchange rate stability
Tools of Monetary Policy
Quantitative Tools
- Required Reserve Ratio
- Rediscount Rate
- Open Market Operations
Required Reserve Ratio
- Determined according to prevailing economic conditions
- Objective is to control the amount of credit granted by commercial banks and thus control the money supply
- In times of recession, reduce required reserve ratio to increase excess reserves and credit availability
- In times of inflation, increase required reserve ratio to decrease money supply and purchasing power
Rediscount Rate
- Interest rate received by the central bank from rediscount of commercial paper or borrowing from the central bank
- Commercial banks re-discount commercial papers or borrow from the central bank to enhance cash reserves
- In times of inflation, increase rediscount rate to discourage commercial banks from re-discounting and reduce funds for lending
- In times of recession, reduce rediscount rate to encourage commercial banks to re-discount and increase lending
Open Market Operations
- Central bank sells or buys securities, especially government securities, to influence the money supply
- In times of recession, buy government securities to increase liquidity and purchasing power
- In times of inflation, sell government securities to decrease liquidity and reduce money supply
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Description
Learn about the definition and goals of monetary policy, including the tools used by central banks to achieve economic objectives.