DLI 100 LEVEL ZOOM

CLASS_4

COURSE: ECN 141- PRINCIPLES OF MACROECONOMICS

DATE: 27/03/2021
TIME: 9AM
 Monetary Policy

• Monetary Policy is a policy that influences the economy through

changes in the banking system reserves, money supply and credit
availability in the economy.
• Monetary policy is controlled by the Central Bank of Nigeria (CBN).
 Objectives of Monetary Policy

The objectives of any monetary policy are:

• · To achieve full employment.
• · To maintain minimum rate of inflation or to have price stability.
• · To promote economic growth and development.
• · To maintain balance of payment equilibrium.
• · To have equitable distribution of income and wealth.
 Objectives of Monetary Policy Cont’d
It should be noted that monetary policy objectives can be achieved through the following
instruments:
• · Legal Reserve Ratio
• · Interest Rate
• · Open Market Operations
• · Special Deposit
• Bank Rate
• · Selective Credit Control
• · Moral Suasion
• · Liquidity Ratio
• · Sales of Stabilization Securities
• · Tools of monetary policy
 Central Bank of Nigeria versus Supply of
Money
Central Bank controls the supply of money through expansionary
monetary policy and contractionary or restrictive monetary policy.
• Expansionary Monetary Policy: This is the shift in the monetary policy
designed to stimulate aggregate demand. For example, the central bank
may reduce interest bank, bank rate and legal reserve ratio so as to increase
the growth rate of the money supply.
• Expansionary monetary policy will stimulate an economy in recession
toward full employment. If the economy is at full employment,
expansionary policy will be inflationary.
Central Bank of Nigeria versus Supply of
Money Cont’d
• Restrictive or Contractionary Monetary Policy: This is a shift of
monetary policy to reduce aggregate demand and place downward
pressure on the general level of prices. For example, reduction in the
level of money supply through increased interest rate, bank rate and
legal reserve ratio.
 Financial Market
Like any other commodity, money is bought and sold in financial market.
Those who have money to sell go to this market to sell it and those who
want to buy money go there to buy it.
• The buying and selling is done at a price called, rate of interest.
• There are two main types of financial market. One is the money
market and the other is the capital market.
• The money market deals with short-term funds while the capital
market deals with long term funds. By short-term funds are required
for any period up to three years.
• Funds that are required for longer periods can be regarded as long-
term funds.
 Functions of Financial Market
The following are functions of financial Market:
1. It allocates savings into investment and tends to obtain equilibrium between the
demand for and supply of loanable funds thereby promoting rational allocation of
resources.
2. A money market promotes liquidity and safely of financial assets and thereby it
encourages savings and investment.
3. A money market promotes financial mobility by enabling the transfer of funds from one
sector to the other.
The various institutions that serve as money markets in Nigeria are CBN, commercial and
merchant banks, insurance companies, discount houses
and other financial institutions.
A well-developed money market is essential for the successful implementation of the
monetary policy of the bank.
 Capital Market
• Capital market is a market for mobilizing long-term securities. These
securities are primarily of two types: debt and equity.
• Debt Instrument are financial claims with an obligation by the insurer
to pay interest at stated intervals and to redeem the issue at a future
date
• Equity capital refers to the capital of the owners of the firms i.e.
ordinary shares/.the ordinary shareholders are entitled to any surplus
of income in the company after the prior right of creditors have been
satisfied.
 Classification of Capital Market
• The Nigerian capital market is categorized into two: the Primary
and Secondary market.
• The primary market is a market for the issuance of new securities.
• The mode of offer for the securities traded in the market includes
offers for subjection, rights issues, and debentures. Stock preference
shares State bonds and unit trusts.
• The primary market is administered by the Securities and Exchange
Commission (SEC), the apex regulatory body of the entire Nigeria
capital market.
 Classification of Capital Market Cont’d
• The secondary market is a market for the sale and purchase of
existing securities.
• The market is organized and managed by the Nigerian stock exchange
(NSE), which brings holders of existing quoted securities wishing to
sell such securities in contact with individuals and institutions who are
interested in buying them.
• The main functionaries on the capital market in Nigeria are the CBN,
commercial and merchant banks, development banks, insurance
companies and stock broking firms.