This document discusses monetary policy, including: - Monetary policy is primarily concerned with interest rates and money supply and is carried out by central banks. - There are two types of monetary policy - expansionary and contractionary. Contractionary policy raises rates to reduce inflation while expansionary lowers rates to boost the economy. - The objectives of monetary policy are to manage inflation and reduce unemployment, with inflation being the primary target. Central banks use various tools like interest rates, securities purchases and requirements to implement monetary policy.

1. By Qasim Shahzad
Monetary Policy

2. There are two types of Policies
Monetary policy and fiscal policy refer to the two
most widely recognized "tools" used to influence a
nation's economic activity. Monetary policy is
primarily concerned with the management of interest
rates and the total supply of money in circulation and
is generally carried out by central banks such as
the Federal Reserve. Fiscal policy is the collective
term for the taxing and spending actions of
governments.

3. Definition of Monetary Policy
It is defined as how central banks manage liquidity to
create economic growth. And, Liquidity is how much
there is in the money supply. That
includes credit, cash, checks and money
market mutual funds.

4. Monetary policy
Central banks have typically used monetary policy to
either stimulate an economy into faster growth or
slow down growth over fears of issues such as
inflation. The theory is that, by incentivizing
individuals and businesses to borrow and spend,
monetary policy will cause the economy to grow
faster than normal. Conversely, by restricting
spending and incentivizing savings, the economy will
grow less quickly than normal.

5. Objectives of Monetary Policy

6. Objectives of Monetary Policy
The primary objective of central banks is to
manage inflation. The second is to
reduce unemployment, but only after they have
controlled inflation.

7. Types of Monetary Policy
There are two types of monetary policy:
 Expansionary monetary policy
 Contractionary monetary policy

8. Types of Monetary Policy
 Central banks use contractionary monetary
policy to reduce inflation. They have many tools to
do this. The most common are raising interest rates
and selling securities through open
market operations.
 They use expansionary monetary policy , often
referred to as "easy monetary policy,“ to lower
unemployment and avoid recession. They lower
interest rates, buy securities from member banks
and use other tools to increase liquidity.

9. Contractionary Monetary Policy

10. Expansionary Monetary Policy

11. Contractionary Monetary Policy
Contractionary monetary policy is driven by increases in the various
base interest rates controlled by modern central banks or through
other means producing growth in the money supply or the total level
of the money supply. The idea is to reduce inflation by limiting the
amount of active money in the economy or to stop unsustainable
speculation or capital investment that might have been caused by
previous expansionary policy.
Contractionary policy sounds as though it is designed to slow down
economic growth, although this is not the case. Instead,
contractionary policies are used to slow down potential distortions,
such as high inflation from an expanding money supply, unreasonable
asset prices or crowding-out effects in capital markets. As such, the
initial effect of contractionary policy might be a reduction in nominal
gross domestic product (GDP), but the final result could be higher and
more sustainable economic growth and a smoother business cycle.

12. Expansionary Monetary Policy
Expansionary monetary policy increases the money
supply in order to lower unemployment, boost
private-sector borrowing and consumer spending,
and stimulate economic growth.
 This is a tool employed by central banks to
stimulate the economy during a recession or in
anticipation of a recession. Expanding the money
supply results in lower interest rates and borrowing
costs, boosting consumption and investment.

13. Expansionary Monetary Policy
 When interest rates are already high, the central bank
focuses on lowering the discount rate. As this rate falls,
corporations and consumers are able to borrow more
cheaply. The declining interest rate makes government
bonds and savings accounts less attractive, encouraging
investors and savers toward assets that are higher on the risk
scale.
 When interest rates are already low, there is less room for the
central bank to cut discount rates. In this case, central banks
purchase government securities. This is known
as quantitative easing (QE). QE stimulates the economy by
reducing the number of government securities in circulation.
The increase of money relative to a decrease in securities
creates more demand for existing securities, lowering
interest rates and encouraging risk taking.

14. Tools of Monetary Policy
Quantitative tools:
 Open market operations
 Bank rate
 Cash reserve requirement
 Liquidity ratio
 Special deposit

15. Tools of Monetary Policy
Qualitative tools:
 Credit rationing
 Credit ceiling
 Moral persuasion
 Direct action
 Advertisement

16. Monetary Policy in Pakistan
Preamble to SBP (State Bank of Pakistan) Act, 1956
envisages monetary policy to secure monetary
stability and attain fuller utilization of economy’s
productive resources. In SBP’s view, the best way to
achieve these objectives on a sustainable basis is to
keep inflation low and stable.

17. Monetary Policy in Pakistan
In practice, SBP’s monetary policy strives to strike a
balance among multiple and often competing
considerations.
These include: controlling inflation, ensuring
payment system and financial stability, preserving
foreign exchange reserves, and supporting private
investment.

18. Monetary Policy Framework
Monetary Policy Objectives:
The preamble of the SBP Act, 1956 envisages these
objectives as ‘whereas it is necessary to provide for the
constitution of a State Bank to regulate the monetary
and credit system of Pakistan and to foster its growth
in the best national interest with a view to securing
monetary stability and fuller utilization of the
country’s productive resources.’

19. Monetary Policy Transmission
Mechanism

20. Currently Applied Monetary Policy
in Pakistan
State Bank of Pakistan announced monetary policy for
two months in Karachi on Saturday 25, march, 2017.
According to SBP statement, the policy rate remained
unchanged at 5.75 percent.

22. THANK YOU 