ADEEL MANSOOR

GROUP LEADER

Members
Salman Saeed
Safiullah Khan
Muhammad Ahmad
MONETARY POLICY AND THE ECONOMY

WHAT IS
CENTRAL BANK

IMPORTANCE FUNCTIONS
OF CENTRAL OF CENTRAL
BANK BANK
 • CENTRAL BANK

• A central bank is a public

institution that is re Protecting
depositors interests responsible for
implementing monetary policy,
managing the currency of a
country and controlling the money
supply.
IMPORTANCE OF
CENTRAL BANK
IMPORTANCE OF CENTRAL BANK

Money Control

Interest Rate

Balance Of Payment

Economic Growth
 • MONEY CONTROL
• Any change in the money supply
affects the price level of the economy.
If the money supply is increased,
there will be an increase in the price
level and vice-versa. Hence, central
bank has a major role in maintaining
the equilibrium between the demand
and supply of money. Central bank
directly controls the supply of money
and can influence the demand for
money for various purposes by using
appropriate monetary policy.
 • INTEREST RATE

• INTEREST RATE: Interest rates are an

important determinant of the investment
demand in the economy. Central bank by
regulating the money supply, can change the
interest rates and thus can stimulate
investment. For example, if the central bank
wants to increase the investment demand it
will increase the money supply. An increase
in the money supply will reduce the interest
rate and borrowings will be cheaper. People
will borrow and invest these funds. Therefore
investment in the economy has been
increased
• BALANCE OF PAYMENT

• The central bank controls the

foreign exchange reserves and
helps to solve the balance of
payments problem faced by the
government. When the imports
exceeds the exports i.e.
expenditure exceeds the income,
central bank uses its foreign
currency reserves to pay the
balance. The central bank also
maintains the stability of the
domestic currency. It avoids
fluctuations in the currency by a
process of buying and selling of
foreign reserves
 ECONOMIC GROWTH

• Central bank facilitates the working of the

commercial banks and encourages new
banks to come up. It helps in rural
development by extending the commercial
bank branches to rural areas. It helps in the
establishment of various financial institutions
which helps in the country’s growth.
• FUNCTIONS OF CENTRAL BANK
FUNCTIONS OF CENTRAL BANK
Currency
Regulator Or
Bank Of Issue
Protecting Bank Of The
Depositors Government
Interests

Clearing House
Custodian Of
For Transfer
Cash Reserves
And Settlement
Custodian Of
International
Currency
 CURRENCY REGULATOR OR BANK OF ISSUE
• Central banks possess the exclusive right to manufacture
notes in an economy. All the central banks across the world
are involved in issuing notes to the economy.
BANK OF THE GOVERNMENT
• One of the important functions of the central bank is to act as the bank to the
government. The central bank accepts deposits and issues funds to the government. It is
also involved in making and receiving payments for the government. Central banks also
offer short term loans to the government in order to recover from bad phases in the
economy
 CUSTODIAN OF CASH RESERVES
• It is a practice of the commercial banks of a country to keep a part of their cash balances
in the form of deposits with the central bank. The commercial banks can draw that
balance when the requirement for cash is high and pay back the same when there is less
requirement of cash
 CUSTODIAN OF INTERNATIONAL CURRENCY
• An important function of the central bank is to maintain a minimum balance of foreign
currency. The purpose of maintaining such a balance is to manage sudden or emergency
requirements of foreign reserves and also to overcome any adverse deficits of balance of
payments
 CLEARING HOUSE FOR TRANSFER AND
SETTLEMENT
• Central bank acts as a clearing house of the commercial banks and helps in settling of
mutual indebtedness of the commercial banks. In a clearing house, the representatives of
different banks meet and settle the inter bank payments.
 PROTECTING DEPOSITORS INTERESTS
• Central bank also needs to keep an eye on the functioning of the commercial banks in
order to protect the interests of depositors
INSTRUENTS OF CREDIT CONTROL

OPEN MARKET OPERTATIONS

BANK RATE/DISCOUNT RATE

REQUIRED RESERVE RATIO

OPEN MARKET OPERATIONS
• Open market operations work by selling and buying government securities by the central
bank of a nation. To increase the money supply, the central bank buys back securities,
while to reduce the money supply it sells securities to the commercial banks
BANK RATE/DISCOUNT RATE
• The bank discount rate is the interest rate for short-term money market instruments like
commercial paper and Treasury bills. The bank discount rate is based on the instrument's
par value and the amount of the discount. The par value is the face value or original value
of the investment when it was first issued. The bank discount rate is the required rate of
return for a safe investment guaranteed by a bank
 THE RESERVE RATIO
• The reserve ratio is the portion of resolvable liabilities that commercial banks must hold
onto, rather than lend out or invest. This is a requirement determined by the
country's central bank, which in the State Bank is the Federal Reserve.
It is also known as the cash reserve ratio.
FORMULA OF RESERVE RATIO
• The Formula for the Reserve Ratio

• Reserve Requirement= Deposits × Reserve Ratio​Reserve