Question

What is meant by Monetary policy?

Explain the following :
1) Bank rate policy
2) Open market operations.

Answer 1

Monetary policy is the macroeconomic policy laid down by the central bank. It involves the management of the money supply and interest rate and is the demand side economic policy used by the government of a country to achieve macroeconomic objectives like inflation, consumption, growth and liquidity.

(i) Bank rate policy: A bank rate is the interest rate at which a nation's central bank lends money to domestic banks, often in the form of very short-term loans. Lower bank rates can help to expand the economy by lowering the cost of funds for borrowers, and higher bank rates help to reign in the economy when inflation is higher than desired.

(ii) Open market operations: Open market operations refer to the buying and selling of government securities in the open market in order to expand or contract the amount of money in the banking system. Securities' purchases inject money into the banking system and stimulate growth, while sales of securities do the opposite and contract the economy. These operations are often conducted on a day-to-day basis.