Saba zafar

18 Arid 867

BBA 5th

Assignment 2

 How central bank of Pakistan control the supply of money.

The methods central banks use to control the quantity of money vary depending on
the economic situation and power of the central bank. In the United States, the central
bank is the Federal Reserve, often called the Fed. Other prominent central banks
include the European Central Bank, Swiss National Bank, Bank of England, People’s
Bank of China, and Bank of Japan.

Some of the common ways that central banks control the money supply—the amount
of money in circulation throughout a country.

 To ensure a nation's economy remains healthy, its central bank regulates the
amount of money in circulation.
 Influencing interest rates, printing money, and setting bank reserve requirements
are all tools central banks use to control the money supply.
 Other tactics central banks use include open market operations and quantitative
easing, which involve selling or buying up government bonds and securities.

Central banks are typically in charge of monetary policy. If things aren’t going well-
unemployment is high, growth is low then more money flowing around the economy
makes it easier for people to get loans to make big investments, which helps the
economy get going again. This is called expansionary, or loose monetary policy.

But when things are going really well, there can sometimes be a problem of inflation,
where prices of everything steadily increase. In these situations the central bank may
want to pul some money out of the system. The idea is that with less money in the
economy, each unit is more valuable. So by decreasing the money supply, a central
bank can prop up the value of its money and stop inflation.

The main way central banks control money supply is buying and selling
government debt in the form of short term government bonds

Economists call this ‘open market operations’, because the central bank is selling
bonds on the open market. Central banks usually own a big portion of their country’s
debt. When thay want to shrink the money supply, they can sell some that debt to
banks or investors. People hand over money to buy the debt, and money us taken out
of the economy, as money that used to be floating from person to person disappears
into the central bank. When the central bank wants to add more money to the
economy it can buy debt, taking government debt out of the economy and replacing it
with new money.

All this bond buying and selling affects the interest rate too.

By shifting the supply and demand for debts, central banks can move the interest rate
to affect how many people take new loans. Changing the interest rate allows central
banks to also impact the money supply indirectly, because each loan a bank makes
actually creates money.

Central banks have other tools to indirectly control the money supply, like requiring
banks to keep more money on hand called reserve requirements, or changing the
interest rate at which they lend money to private banks

In recent years central banks have also experimented with a new policy called
quantitative easing. Basically a turbocharged version of buying bonds.