Economics Essay

3735 Words Mar 5th, 2014 15 Pages
TABLE OF CONTENTS

What is Monetary Policy 1
The Need for Monetary Policy 1
Monetary Policy Tools 2
Types of Monetary Policy 4
Should the Central Bank control the Money Supply or Interest Rate 7
Uses of Monetary Policy 9
Drawbacks of Monetary Policy 11
The Effectiveness of Monetary Policy 12
Monetary Policy of Pakistan 13

What is 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
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As a result of this, the government must intervene to prevent this rapid money growth or else it can prove to be bad for the economy.
Thus as a result of this, monetary policy plays an important role in helping the government stabilize the economy.
Monetary Policy Tools

The Central Bank attempts to achieve economic stability by varying the quantity of money in circulation, the cost and availability of credit, and the composition of a country's national debt. The Central Bank has three tools available to it in order to implement monetary policy: 1. Open market operations 2. Reserve requirements 3. The 'Discount Window'

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.
Reserve requirements are a percentage of commercial banks', and other depository institutions', demand deposit liabilities (i.e. chequing accounts) that must be kept on deposit at the Central Bank as a requirement of Banking Regulations. Though seldom used, this percentage may be changed by the Central Bank at any

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