1 no question: Explain how the Central Bank changes the money supply through

open market operations?

Answer:

The central bank can change the money supply through open market operations
which changes the non-borrowed monetary base. It can also change the monetary
base and so money supply by issuing loans to financial institutions, which
increases borrowed reserves. The central bank can change reserve requirements,
which change the money multiplier, and so the money supply for a given monetary
base.

According to my study I would say that Central banks affect the quantity of money
in circulation by buying or selling government securities through the process
known as open market operations When a central bank is looking to changes
money supply in open market operation those some major changes are given
below:-

1. Increase the quantity of money in circulation

2. It purchases government securities from commercial banks and institutions.

3. This frees up bank assets.

4. In this situation they have more cash to loan.

5. Central banks do this sort of spending a part of an expansionary or easing

monetary policy, which brings down the interest rate in the economy.

In the open market operations to reach a targeted federal funds rate, the interest
rate at which banks and institutions lend money to each other overnight. Each
lending-borrowing pair negotiates their own rate. The federal funds rate in turn
affects every other interest rate. Open market operations are a widely used
instrument as they are flexible easy to use and effective.

Central bank changes monetary development by controlling the liquidity in the

money related framework. In some function of central bank we see the how they
changes money supply through open market operation

1. It is the measure of money that part banks must have clause by each night. The
national bank utilizes it to control how much banks can loan.

2. They utilize open market activities to purchase and sell protections from part
banks. It changes the measure of money close by without changing the save
condition.

3. They utilized this device during the money related emergency. Banks purchased
government bonds and home loan supported protections to settle the financial
framework.

4. They set focuses on financing costs they charge their part banks. That aides rates
for advances, home loans, and securities.

5. Raising loan costs eases back development, forestalling expansion. That is

known as contractionary fiscal arrangement.

Those are the function of central bank that affect highly to changes the money
supply in open market operation.
2 no question: Define money market securities. What are the money market
securities? Explain the Money market securities with Example?

Answer:

We already know that Money currency is not traded in the money markets.
Because the securities that do trade there are short-term and highly liquid and they
are close to being money. In definition of Money market securities have three basic
characteristics in common:

• They are usually sold in large denominations.

• They have low default risk.

• They mature in one year or less from their original issue date.

Most money market instruments mature in less than 120 days. Money market
transactions do not take place in any one particular location or building. Instead,
traders usually arrange purchases and sales between participants over the phone
and complete them electronically

Here are Money market securities and some examples with description are given
below:

1) Treasury bills: it is a transient obligation. It issues T-bills with multi week to

13 weeks and 26 weeks developments on a week by week premise.
2) Negotiable authentication of store: Compact discs with a base presumptive
worth of $100,000. They are ensured by banks, can't be recovered before
their development date, and can as a rule be sold in profoundly fluid optional
markets
3) Repurchase understanding: is a type of momentary acquiring for vendors in
government protections. On account of a repurchase understanding, a seller
offers government protections to speculators, typically on a short-term
premise, and repurchases them the next day at a somewhat more significant
expense.
4) Businesses: Many businesses buy and sell securities in the money markets.
Such activity is Usually limited to major corporations because of the large
dollar amounts Involved.
5) Federal assets: are for the time being borrowings among banks and different
elements to keep up their bank saves at the Central bank. Banks keep holds
at Central bank Banks to meet their save necessities and to clear budgetary
exchanges
6) Banker’s acknowledgment: It is a currency showcase instrument: a
momentary rebate instrument that typically emerges over the span of
worldwide exchange. For instance, somebody may keep in touch with
himself a check as a straightforward methods for moving assets starting with
one ledger then onto the next banker.
3 no question: Explain why an increase in the money supply can affect interest
rates in different ways. Include the potential impact of the money supply on the
supply of and the demand for loanable funds when answering this question?

Answer:

According to my study I know that a larger money supply lowers market interest
rates making it less expensive for consumers to borrow. On the other hand smaller
money supplies tend to raise market interest rates, making it pricier for consumers
to take out a loan. The current level of liquid money supply coordinates with the
total demand for liquid money demand to help determine interest rates.

Here are some points are why money supply can affect the interest rate:

1. The money supply is influenced by supply and demand—and the actions of

the Federal Reserve and commercial banks.
2. The Federal Reserve sets interest rates, which determine what banks charge
each other to borrow money, what the Fed charges banks to borrow money
and what the consumer has to pay to borrow money.
3. Setting interest rates involves assessing the strength of the economy,
inflation, unemployment and supply, and demand.
4. More money flowing through the economy corresponds with lower interest
rates, while less money available generates higher rates.
5. Interest rates also reflect risk premium how much risk both borrowers and
lenders are willing to take on.

The country's central bank or national bank is liable for controlling the cash
flexibly accessible to the business banks. When all is said in done, an expansion in
the flexibly of cash has the impact of bringing down loan costs. This is in such a
case that cash is promptly accessible to advance, at that point credits become more
affordable for borrowers to acquire. On the other hand, if the flexibly of cash
recoils, financing costs increment and it turns out to be more costly to acquire a
credit.

The above effect on loan fees is administered by the effect of gracefully and
request. In any case, there are different elements which oversee financing costs.
Despite the fact that the cash flexibly may be loan costs will be pushed higher.

The potential impact of the money supply on the supply of and the demand for
loanable funds that An increase in money supply that divides two major points
those are:

1. It can increases the supply for loanable funds and therefore can place
downward pressure on interest rates.
2. On the other hand it can also cause inflationary expectations, resulting in an
increased demand for loanable funds and upward pressure on interest rates.

4 no question: Discuss the trade off in monetary policy?

Answer:

Monetary policy is referred to as macroeconomic policy which is formulated by

the central bank. Monetary policy includes effective utilization of money supply.
The objective of monetary policies is balanced inflation and economic growth of
the country.
On the other hand in basic terms a tradeoff is the place one thing increase and
another must decrease. In financial matters a compromise is normally
communicated regarding the open door cost of one expected decision, which is the
loss of the best accessible other option.this is the basic concept off trade off

The trade off in monetary policy

In some situations, it may be desirable to bring inflation rapidly back to target. In

other situations, it may be desirable to apply a longer horizon. In this context, it
may be appropriate to differentiate between supply-side and demand-side
disturbances. The horizon must also been seen in the light of developments in
house prices and debt. However, for monetary policy to function as intended, it is
important that there is confidence in the nominal anchor.

The integration of China and other low-cost countries into the world trade system
has resulted in far lower prices for finished goods. These countries' entry into the
world market has also led to strong economic growth and high demand for oil and
other commodities. This has pushed up both energy and commodity prices.

According to theory ‘There is no long-run tradeoff between the levels of output

and the level of inflation in the model – the Phillips curve is vertical in the long
run. However, there is a long-run tradeoff between fluctuations in output and
fluctuations in inflation. In other words, there is a

Second order curve which is not vertical in the long run .This comparison of the
Taylor curve trade-off with the Phillips curve trade-off is not valid. The Phillips
curve was based on empirical evidence, which was interpreted as reflecting a
cause–effect relation: an increase in inflation will lead to a decline in
unemployment.
The trade-off in the Taylor curve is not an inference from experience. It is an
implication of a policy choice. The central bank is assumed to have two objectives:
an inflation target and an output target. It seeks to minimize a loss function that is a
weighted average of two terms: one based on deviations from the inflation target,
one based on deviations from the output target. A zero weight on the output term
reduces the bank’s objective to inflation alone. Similarly, a zero weight on the
inflation term reduces the bank’s objective to output alone. As the weight varies
between these two extremes the bank’s objective shifts