Q1. What is monetary policy?
Monetary policy is government change in money supply to influence the economy, to solve economies problems. Economies problems include inflation in boom, unemployment etc. change in the money supply move interest rates up or down and affect spending in sectors such as business investment, housing, and foreign trade. Monetary policy has an important effect on both actual GDP and potential GDP.
Q2. If the government wanted to slow down the economy (when in boom) how could it utilize monetary policy? Answer:-
Monetary policy is government change in money supply to influence the economy, to solve economies problems. Economies problems include inflation in boom; unemployment etc. monetary policy has three major instruments. They are given below:- Open market operations
Open market operations are just that, the buying or selling of Government bonds by the Central Bank in the open market. If the Central Bank were to buy bonds, the effect would be to expand the money supply and hence lower interest rates; the opposite is true if bonds are sold. This is the most widely used instrument in the day to day control of the money supply due to its ease of use, and the relatively smooth interaction it has with the economy as a whole.
Discount rate policy
Discount rate policy is where the commercial banks, and other depository institutions, are able to borrow reserves from the Central Bank at a discount rate. This rate is usually set below short term market rates. This enables the institutions to vary credit conditions. That is the amount of money they have to loan out. There by discount rate affecting the money supply. It is of note that the Discount rate policy is the only instrument which the Central Banks do not have total control over.
Reserve requirements are a percentage of commercial banks, other depository institutions demand, and deposit liabilities that must be kept on deposit at the Central...
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