Monetary Policy Monetary Policy is the exercise of the central bank's control over the money supply as an instrument

for achieving the objectives of economic policy ( A J. Shapiro) OR The monetary policy is discretionary action undertaken by the authorities designed to influence (a) the supply of money, (b) cost of money or rate of interest and (c) the availability of money (D.C. Rowan). Objectives of Monetary Policy: These are the objectives of monetary policy. Economic Growth : A government tries to achieve economic development by adopting monetary policy and using its instruments. As a result of economic development , there will be proper utilization of natural & human resources, more capital formation, more employment , increase in national & per capita income, increase in income along with an increase in the standard of living. Price Stablity: Stable prices improves public confidence, promote business activity & ensure equal distribution of income & wealth. As a result, it will enhance the prosperity and welfare in the community. But a determination of a satisfactory price level is a difficult task. Full Employment: It is necessary to increase production and demand. During the boom period the position is automatically achieved as there is rapid increase in demand and thereby production is also increased. On the contrary, during depression there is low production because of low demand and wide unemployment. Hence, the objective of monetary policy is to check rising unemployment during depression period. Instruments of Monetary Policy: following are the instruments of monetary policy that are implemented by the central bank to achieves it objective Open Market Operations: It involve the purchases and sales of government bonds. When the governments purchases government bonds, it increases the reserves of the banking sector, and by the multiple deposit expansion process, the supply of money increases. When the government sells some of its stock of government bonds, the end result is a decrease in the supply of money.

Bank Reserve Requirements: If the government increases bank reserve requirements the banking sector's excess reserves are reduced, leading to a reduction in the supply of money; a decrease in reserve requirements induces an increase in the supply of money. Discount Rate: The discount rate is the interest rate the government charges banks that need to borrow reserves in order to meet reserve requirements. From time to time, unanticipated withdrawals leave banks with insufficient reserves. Banks can make up for deficiencies in their required reserves by borrowing from the government or central bank at the discount rate. If the central bank sets the discount rate high relative to market interest rates, it becomes more costly for banks to fall below reserve requirements. Accordingly, banks will hold more excess reserves, which tends to reduce the multiple expansion of deposits and the supply of money. Similarly, when the discount rate is low relative to market interest rates, banks tend to hold fewer excess reserves, allowing for greater deposit expansion and an increase in the supply of money. Expansionary Monetary Policy: expansionary monetary policy is used by central bank or government by using any of its instruments of monetary policy in such a way as to cause an increase in the supply of money. Contractionary Monetary Policy: contractionary monetary policy is used by central bank or government when it uses its instruments to effect a reduction in the supply of money. Monetary policy in PAKISTAN: The monetary policy of Pakistan is also made and implemented by the central bank or the state bank of Pakistan. They bring change in the monetary policy after each 2 months. The last monetary policy was announce on 08th February 2013 in which they have unchanged the interest rate and remain the same 9.5% but reduces the interest rate corridor from 300 bps to 250 bps. The decision to reduce the interest rate corridor was taken with the objective of improving transmission mechanism by minimizing shortterm volatility in interest rates and to bring more transparency. Responding to a sharply declining inflation and, assigning a higher weight to contracting private investment, the SBP lowered its policy rate by a cumulative 450 basis point over the last 18 months. SBP has also ensured that both the money and the foreign exchange markets remain stable.The inflation rate in Pakistan was recorded at 7.40 percent in February of 2013. Inflation Rate in Pakistan is reported by the Pakistan Bureau of Statistics.