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Inflation Essay

520 words - 3 pages

Monetary policy
Monetarists emphasize keeping the growth rate of money steady, and using monetary policy to control inflation (increasing interest rates, slowing the rise in the money supply). Keynesians emphasize reducing aggregate demand during economic expansions and increasing demand during recessions to keep inflation stable. Control of aggregate demand can be achieved using both monetary policy and fiscal policy (increased taxation or reduced government spending to reduce demand).

(ii) cash reserve ratio 

Second is the changes in the reserve requirements or cash reserve ratio. It is an instrument that. BNM controls the inflation by
increasing the reserve ratio. Cash reserve ratio is a Central Bank regulation that sets the minimum reserves each
commercial bank must hold to customer ...view middle of the document...

Therefore, inflation is controlled to the extent it is caused by the bank credit.

Commercial bank will lost excess reserves >> diminishing their ability to creat money by lending >> commercial bank may find their reserves deficient >> are forced to contract checkable deposits and therefore the money supply.
Besides, An increase in reserve requirements would increase interest rates and this will to reduce the capability to give credit to customer. By doing so, the money supply in the market will decreased and

The higher interest rates will
encourage people to save more and spend
less. It would also make it more expensive
for people to borrow money. This will cause
consumption and investment to slow down
to a level that is more sustainable and
reduce the prospect for high inflation.

i. However, only use in some condition. Normally Central banks do not change the reserve requirements often because it creates very volatile changes in the money supply due to the lending multiplier.

Open market operation influences the money supply in an economy directly. It act as an instrument to reduce or increase commercial bank money supply by selling or buying securities. When inflation rate was high, BNM can sell government bonds either to commercial banks or to the public. reduce their money supply and thus, decrease the capability to give out loans. Reducing loan giving means reduce the flow of money in the market.

Bnm sell the government securities >>> decrease reserves and monetary base>> decrease money supply

I). Fiscal Measures

Fiscal policy is the means by which a government adjusts its levels of spending in order to monitor and influence a nation's economy. It is the sister strategy to monetary policy with which a central bank influences a nation's money supply. These two policies are used in various combinations in an effort to direct a country's economic goals.

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