Mgt604 GDB Solution
Friday, January 21, 2011 Posted In MGT Edit ThisSemester “Fall 2010”
“Management of Financial Institutions (MGT 604)”
This is to inform that Graded Discussion Board (GDB) will be opened according to the following schedule.
Schedule
Opening Date and Time :
January 19 , 2011At 12:01 A.M. (Mid-Night)
Closing Date and Time :
January 21 , 2011 At 11:59 P.M. (Mid-Night)
“Discussion Question”
State Bank of Pakistan has to implement contractionary monetary policy. Discuss how open market operation, one of important tools of monetary policy cab be used in contractionary monetary policy.
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SOLUTION:
Monetary policy can be used in contractionary monetary policy through different ways such as selling Govt. securities and increasing reserve requirement.
Contractionary monetary policy is monetary policy that seeks to reduce the size of the money supply. In most nations, monetary policy is controlled by either a central bank or a finance ministry.
Contractionary actions include increasing banks' reserve requirements, which reduces the amount of money available for lending, and increasing the discount rate, which makes it more costly for banks to fall short of reserve requirements, leading them to engage in less lending. These actions raise interest rates, making borrowing more costly.
Contractionary monetary policy is monetary policy that tends to raise interest rates and lower income. An example of contractionary monetary policy is the Federal Reserve Board selling bonds- banks buy the bonds and their liquid currency (M1,in this case cash) turns into a less liquid form (M2, in this case the bonds). Contractionary monetary policy is used to decrease the money supply (banks have less in reserve, so they can lend less out), increase the interest rate (supply of money drops, demand stays the same, so price of money, or the interest rate rises), decrease investment (interest rates are higher) and thereby decrease income and output. Inflation can be combatted either with monetary or with fiscal policy.
Contractionary monetary policy is monetary policy that seeks to reduce the size of the money supply. In most nations, monetary policy is controlled by either a central bank or a finance ministry.
Contractionary actions include increasing banks' reserve requirements, which reduces the amount of money available for lending, and increasing the discount rate, which makes it more costly for banks to fall short of reserve requirements, leading them to engage in less lending. These actions raise interest rates, making borrowing more costly.
Contractionary monetary policy is monetary policy that tends to raise interest rates and lower income. An example of contractionary monetary policy is the Federal Reserve Board selling bonds- banks buy the bonds and their liquid currency (M1,in this case cash) turns into a less liquid form (M2, in this case the bonds). Contractionary monetary policy is used to decrease the money supply (banks have less in reserve, so they can lend less out), increase the interest rate (supply of money drops, demand stays the same, so price of money, or the interest rate rises), decrease investment (interest rates are higher) and thereby decrease income and output. Inflation can be combatted either with monetary or with fiscal policy.
