5. Distinguish between tight and easy money policies.
(10 Marks)
Tight Money Policy
The economy faces inflation problem.
BNM should try to reduce aggregate demand
by limiting the supply of money.
The purpose is to tighten the supply of
money in order to reduce spending and
control inflation.
Reducing the reserves of commercial banks
through sell securities, increase the reserve
ratio and raise the discount rate.
Increase foreign demand.
Easy Money policy
The economy faces recession and
unemployment.
BNM decides that an increase in supply of
money is needed to increase aggregate
demand so as to employ idle resources.
The purpose is to make bank loans less
expensive and more available and thereby
increase aggregate demand, output and
employment.
Increase the excess reserves of commercial
banks through buy securities, lower the
reserve ratio and lower the discount rate.
Decrease foreign demand.