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Money, Banking, and Financial Market - Assignment Example
Author : altenwerthalver
Pages 10 (2510 words)
Lecturer’s Name and Number Date Submitted Tools of monetary policy Cash reserve ratio The required reserve ratio is a monetary policy instrument used by the central government to control banks’ lending of money. The ratio specifies the amount banks must reserve against what they lend out…
If the required reserve ratio was increased for these big banks they would hold more deposits and lend few. This would not hold the problem at hand as these banks are too big to suffer from search changes (The Editorial Board). The increase would lead rather to a decrease in money supply and thus the public would suffer as this would lead to an increase in interest rates. Graph 1 The graph above illustrates and demonstrates a decrease in money supply, which leads to the increased interest rates. Open market operations Open market operation is the buying and selling of government securities in the open market through the Central Bank of a given country. If there is excess money in the economy or rather inflation, and the government wants to reduce this amount, it will sell its securities to the public. The money obtained is used to develop other sectors of the economy or to invest in investments with high returns (The Editorial Board). If, on the other hand, there is little money in the economy, the government will buy these securities from the public in order to increase money in the economy. To ensure this, government has ensured that the public have information about these securities and are educated on their importance in the economy at large. ...