Académique Documents
Professionnel Documents
Culture Documents
IQRA ASHFAQ
1028
NAYAB AMIN
1007
FILZA WARIS
1017
MEANING
Monetary policy is an instrument which effect
the credit flow in an economy.
DEFINITION
It is a policy of Central Bank to control the supply
of money with aim of achieving of macro
economics stability
(Harry Johnson)
Objective
Full employment
Increase in the production
Increase in the investment
Economic development
Stability of capital market
Proper distribution of wealth
To increase export
Exchange rate stability
Improvement of standard of living
INSTRUMENTS
GENERAL (QUANTITATIVE) Methods
Bank rate
Open market
operations
Cash
Reserve
Ratio
QUALITATIVE
QUANTITATIVE
Credit
Rationing
Change in
Lending
margins
Direct
Controls
Moral
Suasion
Types
A. Bank rate policy
In Depressionary situation
Publicity:
Credit Rationing:
Central Bank fixes credit amount to be granted.
Credit is rationed by limiting the amount available
for each commercial bank. This method controls
even bill rediscounting.
Moral Persuasion:
This is used by many countries. It has a great
influence over the loan policy of banks. There is a
co-operation between them. Under this, the Central
Bank makes an informal request to Commercial
Bank to contract loans in the time of inflation and
expand loans in depression.
Direct Action:
This includes charging penalty interest rates,
qualitative credit ceiling etc. on Commercial
Bank. It has its direction and restrictive
measures, which all the concern banks should
follow regarding the lending and investment.
Expansionary
Contractionary
MV=PY
KEYNESIAN THEORY:
Developed by John Maynard Keynes and his
students.
Keynesians do believe in an indirect link between
the money supply and real GDP. They believe that
expansionary monetary policy increases the supply
of loan able funds available through the banking
system, causing interest rates to fall. With lower
interest rates, aggregate expenditures on investment
and interest-sensitive consumption goods usually
increase, causing real GDP to rise. Hence, monetary
policy can affect real GDP indirectly.
Stimulative Monetary
Policy
Fed
Treasury
Securities
Investors
Bank Funds
Increase
Interest Rates
Decrease
Aggregate
Spending
Increases
Bank Funds
Decrease
Interest Rates
Increase
Aggregate
Spending
Decreases
Restrictive Monetary
Policy
Fed
Treasury
Securities
Investors
Inflation
Decreases
MONEY MULTIPLIER
BANKS
NEW
DEPOSITS
RERUIRED
RESERVE
RATIO 20%
LOAN
80%
1,000
200
800
800
160
640
640
128
512
Other banks
2,560
512
2,048
..
TOTAL
5,000
1,000
4,000
Tradeoffs
Lowering unemployment by stimulating the
economy may increase inflation
Lowering inflation by slowing the economy
may increase unemployment
Economic Indicators
Monitored by the Fed
Indicators of economic growth
Indicators of Inflation
Producer price indexes
Consumer price Indexes
Other indicators
Economic Indicators
Monitored by the Fed
How the Fed uses indicators
Fed meets to decide course of monetary policy
Assesses recent reports on indicators of growth
and inflation
Uses indicators to anticipate how the economy
will change
Decides the appropriate monetary policy given
possible conditions