The Role of the Central Bank in Stabilizing the Economy Essay -- monet

pecuniary PolicyMonetary policy is divided into two categories, contractionary pecuniary policy and expansionary pecuniary policy. Contractionary monetary policy is a policy that reduces the specie give and increases evoke rate. It aims to wordy down economic growth in order to prevent or slow down inflation. Expansionary monetary policy is a policy that lowers quest rate and increases money supply. It aims to stimulate economic growth and to pull the realm out of recession. There atomic number 18 different tools of monetary policy much(prenominal) as slack Market Operations, terminate Rate and Reserve Requirements. The Open Market Operations are one of the major tools in monetary policy. It involves buying and selling bonds to regulate money supply in the fields economy. In term of expansionary monetary policy, the rally desire increases the money supply by buying bonds from commercial banks, and then the funds are increased and the commercial banks can use as loans t o public. When at that place are more cash in the bank, the amour rates will be decreased and this promotes economic growth. In term of contractionary monetary policy, the money supply reduces as the central bank sells bonds to the commercial banks, the short term interest rate of banks increases and therefore it slows down the economic growth.Discount Rate is the interest rate that commercial banks pay to borrow funds from central bank (U.S. Department of State, n.d.). This works when the public deposit money into commercial banks commercial banks also deposit money into the central bank. At the same time, the central bank lends money to commercial banks and commercial banks lend money to the public. When there is inflation, the contractionary monetary policy is applied. The c... ... 6 March 2014Tutor2u, n.d., limitations of gdp when measuring living standards, obtainable from http//www.tutor2u.net/economics/content/topics/livingstandards/limitations_of_gdp.htm 5 March 2014U .S. Department of State, n.d., Bank Reserves and the Discount Rate, available from http//economics.about.com/od/monetaryandfiscalpolicy/a/bank_reserves.htm 3 March 2014Weil, n.d., Fiscal Policy, available from http//www.econlib.org/ subroutine library/Enc/FiscalPolicy.html 4 March 2014Workshop on Fiscal Policy IMF, 2009, The Effectiveness of spontaneous Stabilizers, available from https//www.google.co.uk/url?sa=t&rct=j&q=&esrc=s&source= sack up&cd=16&cad=rja&ved=0CEkQFjAFOAo&url=http%3A%2F%2Fwww.imf.org%2Fexternal%2Fnp%2Fseminars%2Feng%2F2009%2Ffispol%2Fpdf%2Ffatas.ppt&ei=c_4VU-j6NI6AhAf0lYCQDw&usg=AFQjCNHGi-hdnMfsvPmWfdpw6j9cisYLkQ&bvm=bv.62286460,d.ZGU 4 March 2014