1. Discuss why is the smooth functioning of the payments system important.

Any failure of a financial institution to settle its obligations in a timely manner would result
in spillover effects, resulting in other financial institutions not being able to settle their
financial obligations.

2. Discuss why financial stability is important.

• Financial stability creates a conducive environment for businesses to undertake their
activities and for savers and investors to enter into short-term or long-term contracts.
• It is vital that this intermediation as the financial sector has a central role in promoting
economic growth, it is important that the financial system is strong, resilient and efficient in
mobilising savings and undertaking lending activities process continues uninterrupted even in
periods of economic difficulties.
• Example: During the Asian Financial Crisis Thailand, Indonesia, Korea had to borrow
money from International Monetary Fund (IMF) but in return IMF imposed several
restrictions on these countries such as:
• Closing of banks
• Stop subsidies to farmers
• Government servants to take a pay cut
• Government to reduce no of employees. Because these countries had to depend on the IMF
loan, they are not free to make their own policies.

3. Explain how Bank Negara Malaysia controls the inflation rate and prices in
promoting the stability of the Malaysian currency.
- The best way to ensure that the value of the Ringgit is preserved is by ensuring price
stability, that is, to ensure that inflation in the country remains low and stable.
- If inflation is too high, people will be concerned about the purchasing power of their money
balances. This would result in a greater demand for real assets like houses and properties,
which are thought to be more "inflation-proof".
- BNM maintains the stability of the Malaysian currency by implementing monetary policy
and employing the appropriate tools.

4. Discuss how the statutory reserve requirements on commercial banks can be used as
a monetary policy tool during the Covid-19 pandemic.
- The statutory reserve are the reserves which the commercial banks must maintain with
themselves as percentage of deposits as per the guidelines of the central Bank.
- In the situation of Covid-19, the money supply needs to increase to prevent the economy
from going into recession or deepening it more.
- Hence as a part of the monetary policy, if the SRR rate will be reduced by the central Bank,
banks will have to keep lesser amount as reserves and they can lend more money as loans
thus increasing the money supply and boosting the demand in economy.

5. Explain how BNM increase the money supply through open market operation.
- OMO are when the BNM buy or sell securities to change the money supply in the economy.
- If the BNM buys security from the secondary market then the money supply increase.