Answer to Question #124552 in Macroeconomics for Hiba

Question

Central bank want to check the clarity of the market among the commercial bank which tool is used show graphically

Answer 1

Monetary policy

This comprise of the decisions and actions made by the Central Bank for ensuring that the money supply in an economy is directly related or proportionate with the level of economic growth rate and at the same time in an agreement with the price objectives set by the government. This monetary policy is usually aimed at stabilizing the price of goods and services within an economy. Thus, stability may be referred to as maintaining moderate and a stable inflation.

The monetary policies of the Central bank are aimed at maintaining a long term moderate and a stable economy which is an indication of price stability and money gains value within the economy.

Among the monetary policies the Central Bank uses to check the clarity of the Commercial Banks are Reserve requirements and open market operations among other policies. Open Market Operation is where the Central Bank purchases and sells government securities and treasury bills from and to the Commercial Banks respectively. This is aimed at regulating the cash that the Commercial Banks hold which they lend to the public. When purchasing those securities from the Commercial Banks, it means that the cash in their reserves is going to reduce and vice versa.

On the other hand, Reserve requirement is a certain percentage of capital Commercial Banks are required by the Central Bank to hold in reserve so that to cater for any liabilities. These reserve requirements are usually set by the Central Bank. Therefore, increase in the reserve ratios means that there is plenty of capital for circulation within an economy and decrease of the reserve ratio means that there is little money to be circulated within an economy.