Monetary Policy Prepared: Waseem Ulah Khan Lecturer Management Sciences

Monetary Policy Control of money and credit in the country and total money supply is called monetary policy. Note: Central bank of each country prepare monetary policy each year

OBJECTIVES OF MONETARY POLICY Regulation of Money Supply To stabilize Interest Rate To increase Investment To increase Employment Opportunities Price control

MONETARY POLICY TOOLS 1.QUANTITATIVE TOOLS Bank rate policy Open market operation Variation in reserve requirement Credit rationing 2.QUALITATAIVE TOOLS Change in margin requirement Moral persuasion Publicity Direct action

Explanation … QUANTITATIVE TTOLS Bank Rate Policy: It is rate of interest at which central bank advances loans to commercial bank. if central bank make some changes in bank rate,it has its effects on the rate of interest charged by commercial bank, which in return affect volume of loan. Open market operation: Sale and purchase of government securities in the open market (stock exchange) by the central bank is called open market operation

Continue… When the central bank sells securities, the amount of money with people and banks is reduced, then with less amount of cash,the commercial bank has less lending power. in this way the money in circulation is reduced. if the central bank purchased securities, it means it paying out cash, the result is that money supply increased.

Continue.. Variation in Reserve Requirement: The central bank, by changing the reserve requirement, can also control credit money. every member bank keep a percentage of its deposits with central bank. Whenever the central bank desire to decrease money supply, it raises the reserve ratio, and vice versa

Continue… Credit rationing: Sometimes the central bank fixes the limit up to which it can give loans to its member banks. this steps is useful to control money supply. QUALITATIVE TOOLS: Change in margin requirement: Whenever a bank extends loan against a security, it keeps a margin,i.e it gives less amount then the value of security..when the central bank want to reduce the money supply,it ask the member banks to increase margin requirement, in this way amount of loan decreases.

Continue… Moral persuasion: The central bank also exercise moral pressure, so that the bank don't act against the interest of country. Publicity: Central bank undertake publicity about its policies. this also helps to make others banks realize the monetary needs of country. each country central bank issue weekly statement on money and banking position. Direct action: As the last resort, if some bank refuse to act in accordance with the policy of central bank, it take direct action against the banks.

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