SALMAN SAEED

MONETARY POLICY AND THE ECONOMY

 MONETARY POLICY AND THE ECONOMY

• WHAT IS CENTRAL BANK

• IMPORTANCE OF CENTRAL BANK
• FUNCTIONS OF CENTRAL BANK
 • CENTRAL BANK

• A central bank is a public

institution that is re Protecting
depositors interests responsible for
implementing monetary policy,
managing the currency of a
country and controlling the money
supply.
• IMPORTANCE
OF CENTRAL
BANK
• MONEY CONTROL: Any change in
the money supply affects the price
level of the economy. If the money
supply is increased, there will be an
increase in the price level and vice-
versa. Hence, central bank has a
major role in maintaining the
equilibrium between the demand and
supply of money. Central bank
directly controls the supply of money
and can influence the demand for
money for various purposes by using
appropriate monetary policy.
• INTEREST RATE: Interest rates are an
important determinant of the investment
demand in the economy. Central bank by
regulating the money supply, can change the
interest rates and thus can stimulate
investment. For example, if the central bank
wants to increase the investment demand it
will increase the money supply. An increase
in the money supply will reduce the interest
rate and borrowings will be cheaper. People
will borrow and invest these funds. Therefore
investment in the economy has been
increased
• BALANCE OF PAYMENTS: The
central bank controls the foreign
exchange reserves and helps to
solve the balance of payments
problem faced by the
government. When the imports
exceeds the exports i.e.
expenditure exceeds the income,
central bank uses its foreign
currency reserves to pay the
balance. The central bank also
maintains the stability of the
domestic currency. It avoids
fluctuations in the currency by a
process of buying and selling of
foreign reserves
• ECONOMIC GROWTH: Central bank
facilitates the working of the commercial
banks and encourages new banks to come
up. It helps in rural development by
extending the commercial bank branches to
rural areas. It helps in the establishment of
various financial institutions which helps in
the country’s growth.
• FUNCTIONS OF CENTRAL BANK
• CURRENCY REGULATOR OR BANK OF ISSUE: Central
banks possess the exclusive right to manufacture notes in
an economy. All the central banks across the world are
involved in issuing notes to the economy.
BANK OF THE GOVERNMENT
• One of the important functions of the central bank is to act as the bank to the
government. The central bank accepts deposits and issues funds to the government. It is
also involved in making and receiving payments for the government. Central banks also
offer short term loans to the government in order to recover from bad phases in the
economy
 CUSTODIAN OF CASH RESERVES
• It is a practice of the commercial banks of a country to keep a part of their cash balances
in the form of deposits with the central bank. The commercial banks can draw that
balance when the requirement for cash is high and pay back the same when there is less
requirement of cash
 CUSTODIAN OF INTERNATIONAL CURRENCY
• An important function of the central bank is to maintain a minimum balance of foreign
currency. The purpose of maintaining such a balance is to manage sudden or emergency
requirements of foreign reserves and also to overcome any adverse deficits of balance of
payments
 CLEARING HOUSE FOR TRANSFER AND
SETTLEMENT
• Central bank acts as a clearing house of the commercial banks and helps in settling of
mutual indebtedness of the commercial banks. In a clearing house, the representatives of
different banks meet and settle the inter bank payments.
 PROTECTING DEPOSITORS INTERESTS:
• Central bank also needs to keep an eye on the functioning of the commercial banks in
order to protect the interests of depositors