Monetary Policy

Topics: Monetary policy, Central bank, Inflation Pages: 21 (7071 words) Published: December 10, 2012




Group # 5


Sir. Aqeel Somroo


* Group Leader:

1. Umer Farooq Munir(32)
* Group Members:

2. Faisal Ashfaq (24)
3. Sadaf Qazi (15)
4. Mohammad Bilal Khan (44)
5. Zaigham Raza (77)
6. Adeel Ahmed (66)


Attain knowledge before old age settles in
-Hazrat Umer Farooq (R.A)

* Monetary Policy:
Monetary policy is the process by which the monetary authority of a country controls the supply of money, often targeting a rate of interest for the purpose of promoting economic growth and stability. The official goals usually include relatively stable prices and low unemployment. Monetary theory provides insight into how to craft optimal monetary policy. It is referred to as either being expansionary or contractionary, where an expansionary policy increases the total supply of money in the economy more rapidly than usual, and contractionary policy expands the money supply more slowly than usual or even shrinks it. Expansionary policy is traditionally used to try to combat unemployment in a recession by lowering interest rates in the hope that easy credit will entice businesses into expanding. Contractionary policy is intended to slow inflation in hopes of avoiding the resulting distortions and deterioration of asset values. Monetary policy differs from fiscal policy, which refers to taxation, government spending, and associated borrowing. * Contents:

1. Overview
2. Theory
3. History of monetary policy
4. Monetary policy of Pakistan (2012)
5. Trends in central banking
6. Developing countries
7. Types of monetary policy
8. Inflation targeting
9. Price level targeting
10. Monetary aggregates
11. Fixed exchange rate
12. Gold standard
13. Policy of various nations
14. Monetary policy tools
15. Monetary base
16. Reserve requirements
17. Discount window lending
18. Interest rates
19. Currency board
20. Unconventional monetary policy at the zero bound

* Overview:
Monetary policy rests on the relationship between the rates of interest in an economy, that is, the price at which money can be borrowed, and the total supply of money. Monetary policy uses a variety of tools to control one or both of these, to influence outcomes like economic growth, inflation, exchange rates with other currencies and unemployment. Where currency is under a monopoly of issuance, or where there is a regulated system of issuing currency through banks which are tied to a central bank, the monetary authority has the ability to alter the money supply and thus influence the interest rate (to achieve policy goals). The beginning of monetary policy as such comes from the late 19th century, where it was used to maintain the gold standard. A policy is referred to as contractionary if it reduces the size of the money supply or increases it only slowly, or if it raises the interest rate. An expansionary policy increases the size of the money supply more rapidly, or decreases the interest rate. Furthermore, monetary policies are described as follows: accommodative, if the interest rate set by the central monetary authority is intended to create economic growth; neutral, if it is intended neither to create growth nor combat inflation; or tight if intended to reduce inflation. There are several monetary policy tools available to achieve these ends: increasing interest rates by fiat; reducing the monetary base; and increasing reserve requirements. All have the effect of contracting the money supply; and, if reversed, expand the money supply. Since the 1970s, monetary policy has generally been formed separately from fiscal policy. Even prior to the 1970s, the Bretton Woods system still ensured that most nations would form the two...
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