Question

After reading Principles of Macroeconomics, please be able to discuss the concept of monetary policy and banking regulation. Try to relate the concepts to your personal (all be it, perhaps prospective) life.

Answer 1

Monetary policy is driven by central bank and banking regulation as described . Monetary policy is regarded to use tools like Interest rates, cash reserve ratios, government securities to alter money supply in market and lift economy from recession or from hyperinflation.

Monetary policy committee as headed by US Fed Chairman Jenet Yellen last year decided to increase interest rates considering employment at highest levels and sufficient money supply in market.

Hence cash reserve ratio were also increased moderately through which banks have to keep aside more money with central bank.

Also central bank sold government securities to decrease money supply in market. Such policy framework is called contractionary monetary policy to decrease money supply and contract CPI inflation .

These tools can be implemented in ambit of entire banking framework and regulations.