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Presented by:
Bint-e-Zahra
Sajida Bibi
Samya Bibi
Inam Ullah Khan
Naqash Ali
Topic:
Expansionary and Contractionary
monetary policy
Table of contents
• Monetary Policy
• Nature of monetary policy
• Types of monetary policy
• OMO
• Reserve requirement
• Discount Rate
Monetary policy
Monetary Policy is the process by which the monetary authority of a country
controls the supply of money, often targeting the interest rate for the purpose of
promoting economic growth and stability .
According to Harry G. Johnson
“Monetary policy employing the central bank’s control of supply of money as
an instrument for achieving the objectives of general economic policy.”
Nature of Monetary Policy….
Monetary policy uses a variety of tools (interest rate) to control
influence outcome like(economic growth , inflation, exchange
rate with other currencies and unemployment).
It controls the supply of money
Monetary policy works through expansion or contraction of
investment and consumption expenditure.
Types of monetary policy:
Expansionary monetary policy
Contractionary monetary policy
Expansionary monetary policy
The following three monetary policy measures are adopted as a part of
expansionary monetary policy to cure recession & to establish the
equilibrium of national income at full employment level of output.
 The central bank undertakes open market operation
 The central may lower the bank rate
 The central bank may reduce cash reserve ratio
Contractionary 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.
 The central bank sells the Government securities
The central bank may raise bank rate
The central may raise statutory cash reserve ratio
Open Market Operations
The buying and selling of government securities by the Reserve
Bank on secondary markets
It aim to:
manipulate the short term interest rate
manipulate the supply of base money
 control the total money supply
How OMO works?
Buying securities from commercial bank
• Gives up
securities
Bank
• Pays the
bank
Fed/CB
• Increase
reserve
Bank
How OMO works?
Buying securities from public
• Gives up
securities
Public
• Pays
Fed/CB
• Deposits
in bank
Public
• Increase
reserves
Bank
How OMO works?
Selling securities to commercial bank
• Gives up
securities
Fed/CB
• Pays
Bank
• Decrease
reserve
Bank
How OMO works?
Selling securities to public
• Gives up
securities
Fed/CB
• Pays by
check from
bank
Public
• Decrease
reserves
Bank
Reserve Requirements
A certain fraction of deposits that a depository institution is
required to reserve.
It:
Is set by the central bank
Affects the size of loan that the bank can offer
How Reserve Requirements works?
Fed
Reserve requirement
increases
Bank
Loan applications
reject
How Reserve Requirements works?
Fed
Reserve requirement
decrease
Bank Loan applications
accept
Discount Rate
The interest rate charged by Federal Reserve Banks to
depository institutions on short-term loans.
How Discount Rate works?
Topic: Expansionary and Contractionary Monetary Policy | Course: Money and banking | BBA 5th semester

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Topic: Expansionary and Contractionary Monetary Policy | Course: Money and banking | BBA 5th semester

  • 1. Presented by: Bint-e-Zahra Sajida Bibi Samya Bibi Inam Ullah Khan Naqash Ali Topic: Expansionary and Contractionary monetary policy
  • 2. Table of contents • Monetary Policy • Nature of monetary policy • Types of monetary policy • OMO • Reserve requirement • Discount Rate
  • 3. Monetary policy Monetary Policy is the process by which the monetary authority of a country controls the supply of money, often targeting the interest rate for the purpose of promoting economic growth and stability . According to Harry G. Johnson “Monetary policy employing the central bank’s control of supply of money as an instrument for achieving the objectives of general economic policy.”
  • 4. Nature of Monetary Policy…. Monetary policy uses a variety of tools (interest rate) to control influence outcome like(economic growth , inflation, exchange rate with other currencies and unemployment). It controls the supply of money Monetary policy works through expansion or contraction of investment and consumption expenditure.
  • 5. Types of monetary policy: Expansionary monetary policy Contractionary monetary policy
  • 6. Expansionary monetary policy The following three monetary policy measures are adopted as a part of expansionary monetary policy to cure recession & to establish the equilibrium of national income at full employment level of output.  The central bank undertakes open market operation  The central may lower the bank rate  The central bank may reduce cash reserve ratio
  • 7. Contractionary 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.  The central bank sells the Government securities The central bank may raise bank rate The central may raise statutory cash reserve ratio
  • 8. Open Market Operations The buying and selling of government securities by the Reserve Bank on secondary markets It aim to: manipulate the short term interest rate manipulate the supply of base money  control the total money supply
  • 9. How OMO works? Buying securities from commercial bank • Gives up securities Bank • Pays the bank Fed/CB • Increase reserve Bank
  • 10. How OMO works? Buying securities from public • Gives up securities Public • Pays Fed/CB • Deposits in bank Public • Increase reserves Bank
  • 11. How OMO works? Selling securities to commercial bank • Gives up securities Fed/CB • Pays Bank • Decrease reserve Bank
  • 12. How OMO works? Selling securities to public • Gives up securities Fed/CB • Pays by check from bank Public • Decrease reserves Bank
  • 13. Reserve Requirements A certain fraction of deposits that a depository institution is required to reserve. It: Is set by the central bank Affects the size of loan that the bank can offer
  • 14. How Reserve Requirements works? Fed Reserve requirement increases Bank Loan applications reject
  • 15. How Reserve Requirements works? Fed Reserve requirement decrease Bank Loan applications accept
  • 16. Discount Rate The interest rate charged by Federal Reserve Banks to depository institutions on short-term loans.