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Q. Describe about Monetary policy?
By monetary policy we mean policy directed at controlling the money supply and interest rates. In most nations, central bank is responsible for monetary policy. It generally has complete or nearly complete control over:
It also has some control over:
As we shall see in the subsequent section, it's not possible to choose overnight interest rate and monetary base independently of each other. In most nations, main focus of central bank is on controlling the overnight interest rate instead of the monetary base. The subsequent section demonstrates that Central bank should increase the monetary base if it wants to lower the overnight interest rate. When it increases the monetary base, money supply will increase and we would observe a negative correlation between overnight rate and money supply.
When the overnight interest rate decreases, the money supply increases
When the overnight interest rate increases, the money supply decreases
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