Identify 4 tools of Monetary Policy and explain how central banks in the region can use these tools

to help control inflation. 1. 2. 3. 4. Moral Suasion Open Market Operations Legal Reserve Requirements Discount Rates

The Central Bank in any country controls the money supply in the economy. Inflation is a general rise in the price level in the economy. The first tool of monetary policy that central banks can use to control inflation is Moral Suasion. This is persuasion in the form of letters and verbal statements which the central banks uses to encourage commercial banks to take a particular line of action they deem necessary. The second tool that is used is Open Market Operations OMO . This refers to selling government bonds and securities. This can either be contractionary or expansionary. To control inflation, the central bank sells bonds and securities to decrease the money supply in the economy. They take money out the economy and give the owners a bond certificate. Less money in the economy helps to control inflation. Legal Reserve Requirements is the third tool that can be used. This is the amount that commercial banks are required to deposit. To control money supply and inflation, the central bank can increase the percentage value of the legal reserve requirement to withdraw money from the economy. This act controls how much the commercial banks have to lend. The last tool is discount rates. The discount rate is the rate at which commercial banks can borrow money from the central banks. To control inflation, the central bank decreases the discount rate so that the cost of borrowing is too expensive and the commercial bank has less of an incentive to borrow and give loans. This controls the money supply and therefore inflation.