2. The policy which is regulated by central bank to
control the supply of money in the economy.
Control over interest rates in order to maintain
price stability.
Achieving economic Growth.
It is control increase or decrease power of
money.
MONETARY POLICY:
3. OBJECTIVES OF MONETARY
POLICY:
• Economic Growth
• Full Employment
• Price Stability
• Neutrality of Money
• Exchange Rate Stability
4. An increase in the capacity of an economy to
produce goods and services.
Compared from one period of time to another.
Economic growth creates more profit for
businesses.
5. FULL EMPLOYMENT
•An economic situation in which all available
labor resources are being used in the most
efficient way possible.
•Full employment embodies the highest amount
of skilled and unskilled labor that can be
employed within an economy at any given time.
6. PRICE STABILITY:
An economy means that the general price level
in an economy does not change much over time
Does not Inflation and Deflation
Used to try to keep prices stable
The price level where the supply of money
equals demand for it is the equilibrium price
7. NEUTRALITY OF MONEY:
The Change in the stock of money
Affects only nominal variables in the economy such
as prices, wages, and exchange rates
No effect on real variables, like employment, real
GDP, and real consumption
8. EXCHANGE RATE STABILITY:
In which a currency's value is fixed against either
the value of another single currency.
There are benefits and risks to using a fixed
exchange rate.
It is the fixed rate of currency.
Such as Gold.
11. CONTRACTIONARY MONETARY
POLICY:
It is used for contract the money supply and
reduce economic activity.
By raising interest rates to slow the rate of
borrowing by companies, individuals and
banks.
Reduces the purchasing power of every dollar
and steals the benefit of higher wages.
12. TOOLS / INSTRUMENTS OF
MONETARY POLICY
There are two types of instruments such
as:
• Quantitative Measures
• Qualitative Measures
13. QUANTITATIVE MEASURES:
• Open Market Operation
• Change in Reserve Requirements
• Changes in Reserve Capital
• Credit Rationing
• Bank Rate Policy
• Changes in Marginal Requirements
14. OPEN MARKET OPERATION
Purchase and sale of eligible securities by
the central bank.
At inflation and boom, the central bank sells
securities in the open market and withdraws the
surplus money from circulation.
15. CHANGES IN RESERVE RATIO:
Through this policy the central bank determines that a
certain proportion of cash deposit from commercial banks is
to be deposited with it (central bank) so that the central bank
by this way influences the volume of credit in country.
Example in Pakistan a total of 5 % cash is to be kept
against demand and time deposits in the central bank.
16. If the central bank wants to reduce money
supply it increases the reserve ratio
requirement.
If the central bank wants to increase money
supply it decreases the reserve ratio
requirement.
17. CREDIT RATIONING
By credit rationing the central bank fixes the credit
ceiling allowed for each and every commercial bank
and will not give further credit to them beyond limit
allowed.
18. It is the rate at which central bank rediscount
the first class bills.
During the period of inflation central bank
raises bank rate.
During the period of deflation and depression
central bank lowers the bank rate.
BANK RATE:
19. CHANGES IN MARGIN
REQUIREMENTS:
Marginal requirement is the percentage difference between
the value of the collateral against the loan and the amount
of loan given itself to the borrower by commercial banks
Example: The collateral is 100 and the loan given by the
bank is 75. thus by this way we can say that margin
requirement is 25%.
21. DIRECTACTION:
•This method of control will only be applied when
the previous method has failed. As, it is now
assumed that commercial banks have now become a
threat to the policy, in spite of moral suasion i-e they
continue to give loans as usual and thus the central
bank is forced to take direct action against these
commercial banks.
22. PUBLICITY:
From time to time central bank publishes details
concerning commercial banks.
The central bank refers to such measure specially
when the inflation period is getting worse.
The reason for central bank doing this is to keep the
public aware of the commercial banks activities so
that the people actually know to what and where
their money has gone.
23. MORAL SUASION
•Moral suasion means persuasion and request. To
arrest inflationary situation central bank persuades
and request the commercial banks to refrain from
giving loans for speculative and non-essential
purposes. On the other hand, to counteract
deflation central bank persuades the commercial
banks to extend credit for different purposes.