It is a policy of central bank to

control the supply of money often targeting rate of interest with the aim of achieving macro economics stability.

Tool used by the national govt. to influence the economic outcomes

Aims to regulate the volume of the money supply with in economy

Rests as relationship between interest rate and money supply

Price StabilityIncrease in the Investment Economic DevelopmentFull Employment

Reduce Inflation RateBalance Interest RatesImprovement in standard of living

Price stability contributes to achieving high levels of economic activity and employment by

Improving the transparency of the price mechanism

Reducing the inflation risk premier in interest rates

Has a positive impact on economy

Reduces distortions of inflation or deflation

Central bank plays a critical role in every transaction, business and daily activities, whether it is Economic activity or Individual activity (saving schemes or return matters)

Central bank gives money to commercial banks in the time of crises to avoid panic life situations in the markets.

Acts as the Government BankImplements Monetary PolicyActs as a Banker to Commercial Banks

Inflation TargetingPrice Level TargetingMonetary AggregatesFixed Exchange RatesGold Standard

Price Level Targeting is jus like Inflation Targeting.

Price Stability can be achieved with in time

Currency is measured in units of gold bars

Related to the quantity of money supply.

Monetary authority sell and buy as necessary to keep the exchange rate within the band.

QUANTITIVE TOOLS

QUALITATIVE TOOLS

1. Bank Rate Policy (BRP)Rate at which central bank gives loans to commercial banksCentral bank charges 10% as bank rate To control inflation central bank increases the rate of interest

2. Open Market Operation Central bank sells or purchases government securities To remove inflation they sell the government securities Commercial banks will purchase these securities to earn interest

1.Quantitative Instruments

Commercial bank has to keep certain proportion of its assets in the form of reserves

Cash Reserve Ratio (CRR)

Statutory Liquidity Ratio (SLR)

Variation Reserve Ratios (i.e. CRR+SLR)

Central bank Increases the reserve requirements

1. Moral Suasion

Moral request by central bank to commercial banks Loans should not be given for unproductive fields Loans should not be given for speculative purposes and hoarding

2.Consumers Credit Regulation

Applied during inflation If the central bank wants to control the supply of money

central bank issue directions to commercial banksLoans should not be advanced for consumption

purposes

Concerned with the policy of central bank against commercial banks

Central bank will not advance loan to commercial banks, those whose

borrowings are in excess

4.Publicity Central bank keeps an eye over the activities of the commercial

banks

If the commercial banks are found advancing loans

which create inflation

The central bank can black list such banks

Organized capital marketBank rate and other interest ratesWillingness of banksAvailability of large cash reserves

The commercial banks should maintain only a minimum cash

reserve and depend upon the central bank for obtaining reserve.

The central bank requires that the quantity of money should be

increased or decreased to influence the price level.

The bank rate policy should effective only when the lending

rates of commercial bank are affected by changes in bank rate.

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