BBA

th 4

(AZ)

Wosait Ullah Rafique Naqash Aslam Umar Bashir Faiz Ullah

097 094 076 069

The process by which monetary authority (central bank, currency board) of a country controls the supply of money, Targeting the rate of interest, For promoting economic growth and stability.
Official goal: stable prices and low unemployment

Centuries ago
Two forms of monetary policy
Decision about coinage Decision to print paper money to create credit

Executive decision Was generally in the hand of authority with the power of coin

After larger trading network

Ability to set price between gold and silver Price of local currency to foreign currencies

In 7th century
JIAOZI Paper money was originated China Did not replace metallic currency Were used alongside copper coins

1694
Bank of England was created Printing notes and back them with gold Idea of monetary policy began to establish
The original goal was;
To maintain the value of coinage Print notes to trade around the world

1870-1920
Central banking system was set up by industrialized nations Idea of effect of interest rate on economy

October, 1979
Paul Volcker tried this policy 1st time

Today, monetary decisions take into wider range to factors;

Short term interest rate Long term interest rate Exchange rates Credit quality International capital flow of money on large scales Govt. vs. private sector spending/saving

Faiz Ullah
1002212-069

Stability in price level Economic development Arrangement of full employment Expansion of credit facility Equality & Justice Stability in exchange rate

Naqash Aslam
1002212-094

Meaning:These methods help to control quantity of money in the country. the

Bank rate policy

Open market policy Changes in reserve requirements Credit rationing

The rate at which the central bank of the country gives loans to commercial banks is known as Bank Rate or re-discount rate, In Pakistan; State Bank charges 10% as bank rate.

Use of Bank rates

In the inflationary situation
To control inflation Central bank increase rate of interest the commercial bank also increase rate of interest. Loan will be decreases investment, output and prices will be fall. Inflation will be controlled.

In the depressionary situation

To remove deflation Central bank decrease the bank rate and commercial bank also decrease the bank rate. People will get more loan investment, production, and prices will be rising up. Deflation will be control.

Its include the sales and purchase by the central bank, of Assets Foreign exchange Gold Government securities Company securities

Use of Open Market operation

In the inflationary situation
Central bank decrease the money supply. Central bank sale out the securities to commercial bank and control money supply.

In the depressionary situation

Central bank increase the money supply. Central bank purchase the securities from the commercial bank.

Commercial bank has to keep a certain percentage of his deposits in the form of reserves just to meet the demand of the depositors.

As in the case of Pakistan, each commercial bank has to keep 30% of its deposits to meet the needs of its depositors.

Inflationary condition
If the central bank realizes that the commercial banks are advancing excessive loans, it will increase the reserve requirements. Accordingly, commercial banks could advance less loans.

Deflationary condition
On the other hand, in deflation, if the central bank reduces the reserve requirements, the commercial banks will be able to advance' more loans.

Umar Bashir
1002212-076

There are several types qualitative tools for monitory policy which are as follows:
Credit Rationing
Under this, certain conditions are laid by the Central Bank to see proper regulation of consumer credit. This is to prevent excess expansion of credit.

Direct Action
This includes charging penalty interest rates, qualitative credit ceiling etc. on Commercial Bank. It has its direction and restrictive measures, which all the concern banks should follow regarding the lending and investment.

Margin Requirement
Margin refers to difference between market value and amount borrowed against the securities. Bank, while advancing loan against security, do not lend the full amount, but less. This is done keeping in view the difference between the value of security and the amount of advance to cover any loss.

Moral Persuasion
This is used by many countries. It has a great influence over the loan policy of banks. There is a cooperation between them. Under this, the Central Bank makes an informal request to Commercial Bank to contract loans in the time of inflation and expand loans in depression. It helps the Central Bank to secure the willingness and co-operation, but then that depends on the amount of respect and authority the Central Bank enjoys among the member banks.