Monetary Policy and Equation of Exchange
The monetary policy has been defined as the policy that is used by the Federal Reserve (the central bank of the US) or the central bank (the central bank of India is RBI) along with the use of the supply of money to accomplish certain macroeconomic policies. Monetary policy is a supply-side macroeconomic policy that supervises the growth rate and money supply in the economy.
Monetary Economics
As from the name, it is very evident that monetary economics deals with the monetary theory of economics. Therefore, we can say that monetary economics, is that part of economics that provides us with the idea or notion of analyzing money as a holding with its function, which acts as the medium of exchange, the store of value through which the buying and selling are done and also the unit of account. It also helps in formulating the framework of the monetary policy of a bank in an economy which ultimately results in the welfare of the people residing in that particular economy. The monetary policy of an economy also helps to analyze and evaluate the financial health of it.
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All central banks have three tools of monetary policy in common.
- First, all of them use open market operations. They buy and sell government bonds and other securities from member banks. This action changes the reserve amount the banks wear hand. a better reserve means banks can lend less. That's a contractionary policy.
- The second tool is that the reserve requirement, within which the central banks tell their members what quantity money they have to stick with it reserve each night. When a financial organisation wants to limit liquidity, it raises the reserve requirement. that provides banks less money to lend. When it wants to expand liquidity, it lowers the need that provides members banks extra money to lend. Central banks rarely change the reserve requirement.
- The third tool is that the discount rate. That's what quantity a financial organisation charges members to borrow funds from its discount window. It raises the discount rate to discourage banks from borrowing. That action reduces liquidity and slows the economy. By lowering the discount rate, it encourages borrowing. That increases liquidity and boosts growth.
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