As a governor of the Central Bank of Egypt, how could you use the THREE tools of monetary policy to control inflation and recession? Discuss each tool and use a table to demonstrate your analysis for the two scenarios
As a governor of the Central Bank of Egypt, how could you use the THREE tools of
Monetary policy refers to the tool which is used by central bank in order to increase or decrease money supply in the economy.
The main instruments of monetary policy that are used by central bank :
Open market operations
It refers to sale and purchase of bonds by the central bank in open market. In order in increase money supply in the economy the central bank buys bond. On other hand if central bank wants to decrease money supply in the economy in this case the central bank sells bond.
Bank Rate
It is the rate at which central bank is giving loans to the commercial banks. During inflation bank rates will increase by central banks in order to limit the borrowings by commercial banks. In contrary in the case of deflation the central bank will decrease bank rate.
Cash reserve ratio
CRR is the certain minimum cash reserve which commercials banks have to maintains with central bank as percentage of their total deposits. When CRR is increased by central banks then the credit creation by commercial banks will fall and when CRR is decreased by central banks then the credit creation by commercial banks will rise.
Step by step
Solved in 2 steps
