Hazel Ortaliz

MONETARY POLICY TOOLS

• An economic policy that manages the size and growth rate of the money supply
in an economy.

• A central bank’s actions and communications that manage the money supply. 

• consists of the process of drafting, announcing, and implementing the plan of

actions taken by the central bank of a country

Central Bank - control and manipulate the national money supply

OBECTIVES:

• Inflation - Monetary policies can target inflation levels. A low level of inflation is
considered to be healthy for the economy. If inflation is high, a contractionary
policy can address this issue.

• Unemployment- Monetary policies can influence the level of unemployment in

the economy.

• Currency exchange rates- Using its fiscal authority, a central bank can regulate
the exchange rates between domestic and foreign currencies.

MONETARY TOOLS

1. Open Market Operation

 The central bank can either purchase or sell securities issued by the
government to affect the money supply.
 Helps fed promote stable prices and maximum employment by changing
the supply of reserves in the banking system
 one of multiple tools that the Federal Reserve uses to enact and maintain
monetary policy
2. Discount Rate

 Is the interest rate Reserve Banks charge commercial banks for short-
term loans.
 Federal Reserve lending at the discount rate complements open market
operations in achieving the target federal funds rate and serves as a
backup source of liquidity for commercial banks.
 Lower and Higher Discount Rate

3. Reserve Requirements
 Portions of deposits that banks must hold in cash, either in their vaults or
on deposit at a Reserve Bank.
 decrease and increase in reserve requirements
 Raising the reserve requirement reduces the amount of money that banks
have available to lend.