TOOLS FOR

MONETARY
POLICY
 MONETARY POLICY
Is a set of tools used by nation’s
central bank to control the overall money
supply and promote economic growth
and employment strategies such as
revising interest rates and changing bank
reserve requirements.
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 TYPES OF
MONETARY
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POLICY
 CONTRACTIONARY EXPANTIONARY
Is a policy increases
During times of
interest rates and limits the slowdown or
outstanding money supply to recession, an
slow growth and decrease expansionary policy
inflation, where the prices of grows economic
goods and services in an activity. By lowering
economy rise and reduce the interest rates, saving
purchasing power of supply. becomes less
attractive, and
consumer spending
and borrowing
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increase.
 GOALS OF MONETARY
Contractionary monetary policy is used
POLICY to temper inflation and reduce the level
Inflation of money circulating in the economy.
Expansionary monetary policy fosters
inflationary pressure and increases the
amount of money in circulation.

Unemployment An expansionary monetary policy decreases

unemployment as a higher money supply and
attractive interest rates stimulate business
activities and expansion of the job market.
Exchange The exchange rates between domestic and foreign
Rates currencies can be affected by monetary policy. With an
increase in the money supply, the domestic currency
5 becomes cheaper than its foreign exchange.
 TOOLS OF
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MONETARY
 In open market operations, the
OPEN federal reserve bank buys bonds
MARKET from investors or sell additional
OPERATION bonds to investors to change the
S number of outstanding
government securities and money
available to the economy as a
whole.
HOW OPEN MARKET OPERATIONS AFFECT
THE MONEY SUPPLY AND INTEREST
RATES?
By buying or selling bonds, bills, and other financial instruments
in open market, a central bank can expand or contract the amount of
reserves in the banking system and can ultimately influence the
country’s money supply. When the central bank sell such instruments
it absorbs money from the system.

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 Is a tool taken by the central
bank to control the money
circulation by raising or lowering
DISCOUNT interest rates. If the central bank
POLICY raised bank rates, the aims is to
reduce money supply in the
economy. With the high rates,
people are expected to not take out
loans and save their money in bank.
 Authorities can manipulate the
RESERVE reserve requirements, the funds that
REQUIREME banks must retain as a proportion of
NTS deposits made by their customers to
ensure that they can meet their
liabilities.
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YOU!