Monetary policy AND TYPES

1. MONEY AND BANKING Name: Class: Topic: Date: Submitted to: Muhammad Asad BS III Monetary policy and its types 28-2-2013 Miss Sauda Asif

2. Monetary policy: Monetary policy  is the process by which the  monetary authority of a country control the supply of money  for the purpose of promoting  economic growth and stability. In other words: This policy is adopted by the central bank of an economy in order to control & regulate the money supply in the country as to stabilize the economy. The main function of monetary policy is to control & regulate credit money.

3. TYPES OF Monetary policy: There are two types of monetary policy: Expansionary monetary policy Contractionary monetary policy

4. expansionary monetary policy: Expansionary monetary policy is appropriate when the economy is in recession and unemployment is a problem. The goal of expansionary monetary policy is to reduce unemployment. Therefore the tools would be an increase in the money supply. To increase the money supply the federal government can: Buy government bonds(open market purchase) Lower the interest rate Lower the reserve ratio

5. expansionary monetary policy: This would shift the AD curve to the right decreasing unemployment but it may also cause some inflation. Change the money supply affect the economy through a these process:

6. Contractioanary monetary policy: Contractionary monetary policy is appropriate when economy is in expansion and inflation is a problem. The goal of contractionary monetary policy is to reduce inflation. Therefore the tool would be the decrease in the money supply. To decrease the money supply the federal reserve can: Sell government bonds(an open market sell) Raise the interest rate Raise the reserve ratio

7. Contractioanary monetary policy: This would shift the AD curve to the left decreasing inflation. But it may also cause some unemployment. Change the money supply affect the economy through these process: