Illustrates the term monetary policy

Question

Illustrates the term monetary policy?

Answer 1

Monetary Policy:

It refers to the programs adopted through the central bank to control the supply of money. The central bank may resort to open market operations, variations in bank rate or changes within the variable reserve ratio. There open market means the purchase and sale of government securities and bonds. Within the boom period the central bank sells government securities and bonds to the public that helps to withdraw money by the public. Throughout periods of depression the central bank purchases government securities that increase the cash supply in the economy. It helps to increase investment.

The central bank purchase government securities that raise the cash supply in the economy. It assists to increase investment. The central bank might change the bank rate or rediscount rate. The bank rate is the rate at which commercial banks borrow from central bank. When the central bank raises the bank rate the commercial banks in turn will increase their discount rates for the public. It discourages public borrowing and this decreases investment. Throughout the depression the bank rate is lowered that will end up the raised investment. The central bank can control the money supply by changing the variable reserve ratio. While the central bank needs to reduce the credit creation capacity of commercial banks, this will raise the ratio of the deposits to be held through the commercial bank as reserve along with the central bank.