Question

Please answer the following questions:

1) Identify the goals of monetary policy.

2) Explain the difference between expansionary and contractionary monetary policy?

3) Give examples of four tools of monetary policy to affect the money supply?

4) In the money market, what will happen to the Supply of money when the Federal Reserve bank buys back U.S. bonds?

5) In the money market, what will happen to the Supply of money when the Federal Reserve bank increases the discount rate?

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Answer #1

Answer 1.

Goals of monetary policy are

Neutrality of money: One of the aims of monetary authority is not to deviate from the neutrality of money which means that quantity of money should be perfectly stable.

Stability of exchange rates: Stable exchange rates plays an important role in international trade. Thus the main objective of monetary policy is to maintain stability in the external equilibrium of the country.

Price stability: One of the main objectives of monetary policy to maintain price levels in the economy or to control inflation of the economy.

Full Employment: Monetary policy can be used to deal the problem of under employment and disguised unemployment by creating new opportunities for employment.

Economic Growth: Monetary policy tries to maintain equilibrium between the total demand for money and total production capacity and further creating favourable conditions for saving and investment.

Equilibrium in the Balance of Payments: Equilibrium in the balance of payments is another objective of monetary policy. Monetary authority tries to keep the balance of payment in equilibriums.

Answer 2.

An expansionary monetary policy means expanding/increasing the money supply in an economy. On the other hand, a contractionary monetary policy means the opposite i.e. decreasing the money supply in the economy. The central bank uses different tools to increase or decrease the money supply which further affect interest rates and prices in the economy.

Answer 3.

Four tools of monetary policy are

Discount Rate: The discount rate is the interest rate Reserve Bank charges commercial banks for short-term loans.

Reserve Requirements: Reserve requirements are the portions of deposits that banks must hold in cash, either in their vaults or on deposit at Reserve Bank

Open market operations: Open market operations means buying and selling of U.S. government securities in order to increase or decrease the money supply in the economy

Interest on reserves: Interest on reserves is paid on excess reserves held at Reserve Bank

Answer 4.

Money supply will increase when Federal Reserve buys back US bonds. Keeping price constant, it will result in decrease in interest rate which will bring the economy back to the equilibrium.

Answer 5.

Money supply will decrease when Federal Reserve raises discount rate. It is contractionary in nature because higher rates discourage lending as lending cost will increases due to higher discount rate.

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Answer #2

Answer 1.

Goals of monetary policy are

Neutrality of money: One of the aims of monetary authority is not to deviate from the neutrality of money which means that quantity of money should be perfectly stable.

Stability of exchange rates: Stable exchange rates plays an important role in international trade. Thus the main objective of monetary policy is to maintain stability in the external equilibrium of the country.

Price stability: One of the main objectives of monetary policy to maintain price levels in the economy or to control inflation of the economy.

Full Employment: Monetary policy can be used to deal the problem of under employment and disguised unemployment by creating new opportunities for employment.

Economic Growth: Monetary policy tries to maintain equilibrium between the total demand for money and total production capacity and further creating favourable conditions for saving and investment.

Equilibrium in the Balance of Payments: Equilibrium in the balance of payments is another objective of monetary policy. Monetary authority tries to keep the balance of payment in equilibriums.

Answer 2.

An expansionary monetary policy means expanding/increasing the money supply in an economy. On the other hand, a contractionary monetary policy means the opposite i.e. decreasing the money supply in the economy. The central bank uses different tools to increase or decrease the money supply which further affect interest rates and prices in the economy.

Answer 3.

Four tools of monetary policy are

Discount Rate: The discount rate is the interest rate Reserve Bank charges commercial banks for short-term loans.

Reserve Requirements: Reserve requirements are the portions of deposits that banks must hold in cash, either in their vaults or on deposit at Reserve Bank

Open market operations: Open market operations means buying and selling of U.S. government securities in order to increase or decrease the money supply in the economy

Interest on reserves: Interest on reserves is paid on excess reserves held at Reserve Bank

Answer 4.

Money supply will increase when Federal Reserve buys back US bonds. Keeping price constant, it will result in decrease in interest rate which will bring the economy back to the equilibrium.

Answer 5.

Money supply will decrease when Federal Reserve raises discount rate. It is contractionary in nature because higher rates discourage lending as lending cost will increases due to higher discount rate.


answered by: ANURANJAN SARSAM
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