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1. Presented by:
Bint-e-Zahra
Sajida Bibi
Samya Bibi
Inam Ullah Khan
Naqash Ali
Topic:
Expansionary and Contractionary
monetary policy

2. Table of contents
• Monetary Policy
• Nature of monetary policy
• Types of monetary policy
• OMO
• Reserve requirement
• Discount Rate

3. Monetary policy
Monetary Policy is the process by which the monetary authority of a country
controls the supply of money, often targeting the interest rate for the purpose of
promoting economic growth and stability .
According to Harry G. Johnson
“Monetary policy employing the central bank’s control of supply of money as
an instrument for achieving the objectives of general economic policy.”

4. Nature of Monetary Policy….
Monetary policy uses a variety of tools (interest rate) to control
influence outcome like(economic growth , inflation, exchange
rate with other currencies and unemployment).
It controls the supply of money
Monetary policy works through expansion or contraction of
investment and consumption expenditure.

5. Types of monetary policy:
Expansionary monetary policy
Contractionary monetary policy

6. Expansionary monetary policy
The following three monetary policy measures are adopted as a part of
expansionary monetary policy to cure recession & to establish the
equilibrium of national income at full employment level of output.
 The central bank undertakes open market operation
 The central may lower the bank rate
 The central bank may reduce cash reserve ratio

7. Contractionary monetary policy
Contractionary monetary policy is appropriate when economy is in
expansion and inflation is a problem. The goal of contractionary monetary
policy is to reduce inflation.
 The central bank sells the Government securities
The central bank may raise bank rate
The central may raise statutory cash reserve ratio

8. Open Market Operations
The buying and selling of government securities by the Reserve
Bank on secondary markets
It aim to:
manipulate the short term interest rate
manipulate the supply of base money
 control the total money supply

9. How OMO works?
Buying securities from commercial bank
• Gives up
securities
Bank
• Pays the
bank
Fed/CB
• Increase
reserve
Bank

10. How OMO works?
Buying securities from public
• Gives up
securities
Public
• Pays
Fed/CB
• Deposits
in bank
Public
• Increase
reserves
Bank

11. How OMO works?
Selling securities to commercial bank
• Gives up
securities
Fed/CB
• Pays
Bank
• Decrease
reserve
Bank

12. How OMO works?
Selling securities to public
• Gives up
securities
Fed/CB
• Pays by
check from
bank
Public
• Decrease
reserves
Bank

13. Reserve Requirements
A certain fraction of deposits that a depository institution is
required to reserve.
It:
Is set by the central bank
Affects the size of loan that the bank can offer

14. How Reserve Requirements works?
Fed
Reserve requirement
increases
Bank
Loan applications
reject

15. How Reserve Requirements works?
Fed
Reserve requirement
decrease
Bank Loan applications
accept

16. Discount Rate
The interest rate charged by Federal Reserve Banks to
depository institutions on short-term loans.

17. How Discount Rate works?