Question 1: Monetary Policy Question 2. International Finance and the Exchange Rate - Assignment Example

Thus, when interest rates go up, the production structure becomes less roundabout, reallocating productive resources toward consumer goods from producer goods. When interest rates go up, higher return rates of production are essential to compete with financial instruments like relatively higher-yielding government bonds. This is why an increase in the demand for bank reserves leads to a rise in the money supply. The rise in the demand for reserves makes the reserves demand curve shift to the right, which, on the other hand interests rates.

To avert this, the Central Bank buys bonds to raise the supply of reserves and then the open market purchases will cause the money supply and the monetary base to rise. When the interest rate is manipulated, it affects the market and either production possibilities will not be realized or investors will invest in projects which they earlier would not have because the market interest rate was artificially low. Compare the use of open-market-operations, central bank lending facilities (rediscounting), and changes in reserve requirements to control the money supply on the following criteria: flexibility, reversibility, effectiveness, and speed of implementation.

The Central Bank buys and sells securities in order to set the money supply in a process called open market operations. In order to raise the money supply, the Central Bank buys securities from other banking institutions and in order to decrease the money supply, the sell securities. This means that the entire process is flexible and is effective allows the Central Bank to control the money supply in the market and allows easier access to capital at any time, thus leads to much greater investment in the market, plus it stimulate growth of the economy.

When it comes to lending of money, by managing the national interest rate, this body can appropriately meet and dictate the demand (consumer) for money, making the entire process