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How central bank can play a role to control the inflation of the economy in?
Wiki User
∙ 12y ago
In simple words, Inflation means price rise and erosion in value of money over a period of time.
Simply said, it is the increase in prices of products. It doesn't necessarily have to be a negative thing. It results in decline in value of goods over a period of time. Eg. A thing that might have costed Rs. 10 five years back would cost Rs. 15 now due to inflation. Hence, we end up paying more for the same thing (same quantity).
Inflation is controlled by the Central Bank of an economy via its monetary policy stance and interest rates.
Wiki User
∙ 12y ago
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How does central bank control inflation?
the central bank controls inflation through one of the following, open market operation,special deposit,cash ratio,bank rate,funding,credit ceiling etc.
How do central bank control the quantity of money in circulation?
Central banks control the quantity of money in circulation by printing more bills when the central storage is low and refraining from printing when the country is suffering from inflation.
Why is the supply of money in an economy not solely determined by central bank?
The supply of money IS controlled by the central bank. However, in some countries the politicians interfere with the Central Bank.
Why do central bank an important role in the global economy?
Central banks control the foreign currency reserves that are used for international trade.They also set each country's monetary policies.
How does monetary policy determine exchange rate?
the ability of a country to make its own money and to set its own interest rates. the supply of money and interest rates. MONETARY POLICYMonetary policy is the oldest policy for the economic stability. It is a policy which is adopted by the central bank of the country to control the supply of money: We can say that all those methods which are adopted by central bank, of the country to control the supply of money are called the monetary policy. In simple words, monetary policy means monetary management. In the words of Harry G. Johnson, "It is a policy of central bank to control the supply of money with the aim of achieving macroeconomic stability". Tools Of Monetary Policy They are classified into 1. Quantitative Methods 2. Qualitative Methods 1. Quantitative Methods: They consists of those methods which Physically affect the amount of credit creation in the economy. They are as: 1) Changes in Bank Rate Policy or Rediscount Rate: The rate at which the central bank of the country gives loans to commercial banks is known as Bank Rate or re-discount rate, In Pakistan; State Bank charges 10% as bank rate. By changing such rate of interest, the central bank can influence the supply of money in the country. To control inflation the central bank increases the rate of interest. The commercial banks will also increase their rate of interest. Accordingly, the loans will decrease, investment, output and prices will fall. In this way, inflation will be controlled. Now, we assume that the country is facing deflation. To remove deflation central bank will decrease the bank rate, the commercial banks will also decrease the rate of inl91'Cst. In this way, people will get more loans. Investment production, employment and Prices will start rising up. Accordingly, deflation will be controlled. Limitations: But the success of the bank rate policy depends upon * The fact that how flexible is the economic system. How rapidly, there will be the effect of bank rate on other variables of the economy, like prices, wages, Interest and output, etc. * Commercial banks should abide by the instructions of the central bank. If the central bank brings changes in the rate of interest, the commercial banks should also change the rate of interest. * If commercial banks already have excess reserves then commercial banks will not depend upon central bank. It this way, they will not care for changes in the rate of interest from central bank. * If economic activity is flourishing or economy is having boom, then the business class will be prepared to pay even higher rate of interest and inflation will not to be controlled. 2) Open Market Operation .. This is the second instrument of the monetary policy. Under this technique, the central bank sells or purchases 'government securities. If the central bank finds that commercial banks are providing excessive loans which are creating inflation. To remove the inflation, the central bank sells the government securities. The commercial banks will purchase these securities to earn interest against such securities. In this way, the resources of commercial banks will go down. They will advance less loans. Accordingly, the inflation will be controlled. If there is deflation in the economy. To control the deflation, the central bank purchases the government securities. Then the monetary base of the commercial banks will increase their loaning power will increase. As a result, investment will increase, income and prices will go up. LimitationsThe problem is that, in most of the countries the money market is not organized where the securities could be sold or bought. The funds which are collected through sale of government securities should not be spent on unproductive fields. 3) Changes in Reserve Requirements Each commercial bank has to keep a certain proportion of its deposits in the form of reserves just to meet the demands of the depositors. As in the case of Pakistan, each commercial bank has to keep 30% of its deposits to meet the needs of its depositors. The central bank can influence this reserve rate. If the central bank realizes that the commercial banks are advancing excessive loans, it will increase the reserve requirements. Accordingly, commercial banks could advance less loans. On the other hand, in deflation, if the central bank reduces the reserve requirements, the commercial banks will be able to advance' more loans. Hence, deflation could be removed. 4) Changes in Reserve CapitalEach commercial bank has to keep a certain ratio of its deposit with central bank. In case of Pakistan, each commercial bank has to keep 5% of its deposit in the central bank. By changing the reserve capital, a central bank can control the supply of money by commercial banks. When there is inflation in the economy. To remove this inflation, the central bank will increase the reserve ratio. As a result, lending of commercial banks will fall. As a result the supply of money will decrease. On the other hand, if central bank decreases the 'reserve ratio, the commercial banks will be having more funds to advance. Accordingly, the deflation could be controlled. 5) Changes in Marginal Requirements Commercial banks do not give loans against leaves, rather they ask for pledges to make. How much a person will have to pledge is settled by the central bank. This is given the name of marginal requirement. The central bank can bring changes in the marginal requirements. If there is inflation in the economy, the marginal requirements will increase. In this way, people will get less loans. As a result, supply of money will decrease. During deflation the marginal requirements are decreased. Hence people will get more loans from the commercial banks. As a result supply of money will go up and deflation will be controlled. 6) Credit Ceiling/Rationing of Credit The central bank can issue directions that loans will be given to commercial banks upto a certain limit. As a result, the commercial banks-will be careful in advancing loans to the people. But this is a very strict method, hardly adopted by the central bank. Moreover, if the commercial banks are having other sources to borrow, they will not bother for this policy. 2) Qualitative Methods * Moral Suasion: It is concerned with just as a moral request by central bank to commercial banks that loans should not be given for unproductive fields which create inflation. Loans should not be given for speculative purposes and hoarding. But such like requests could be effective in the developed countries. * Consumers Credit Control: This instrument is applied during inflation. If the central bank wants to control the supply of money, it will issue directions to commercial banks that loans should not be advanced for consumption purposes or for consumer durables because they create inflation. * Direct Action: The instrument of direct action is concerned with the policy of central bank against commercial banks. It can refuse to give loans to commercial banks. The central bank will not advance loan to commercial banks for the sectors which create inflation. Moreover, if commercial banks do not follow the instructions of the central bank, It will refuse to lend commercial banks * Publicity: The central bank of the country is the overall in charge of economic stability of the country. Its aim is to protect the economy from inflation and deflation. For this purpose, it analyses the whole economy. It keeps an eye over the activities of the commercial banks. If the commercial banks are found advancing loans which create inflation, their activities will be unhealthy for whole economy. The central bank can black list such banks. Thus to avoid such bad reputation in' future, they will be careful in advancing loans. By: Shafaq Chohan
How does central bank control inflation?
the central bank controls inflation through one of the following, open market operation,special deposit,cash ratio,bank rate,funding,credit ceiling etc.
How central bank control inflation?
the central bank controls inflation through one of the following, open market operation,special deposit,cash ratio,bank rate,funding,credit ceiling etc.
Was the ATM the answer to inflation?
No. The ATM does not in any way affect or answer inflation. It is just a machine through with customers can do banking transactions without visiting their bank. It does not cause or affect inflation. Only the country's central bank can control inflation by changing regulatory policies.
How do central bank control the quantity of money in circulation?
Central banks control the quantity of money in circulation by printing more bills when the central storage is low and refraining from printing when the country is suffering from inflation.
Which among the following measure of controlling inflation can be taken up byReserve Bank of India and not by Government of India?
I).Monetary Measures The most important and commonly used method to control inflation is monetary policy of the Central Bank. Most central banks use high interest rates as the traditional way to fight or prevent inflation. Monetary measures used to control inflation include: (i) bank rate policy (ii) cash reserve ratio and (iii) open market operations. Bank rate policy is used as the main instrument of monetary control during the period of inflation. When the central bank raises the bank rate, it is said to have adopted a dear money policy. The increase in bank rate increases the cost of borrowing which reduces commercial banks borrowing from the central bank. Consequently, the flow of money from the commercial banks to the public gets reduced. Therefore, inflation is controlled to the extent it is caused by the bank credit. Cash Reserve Ratio (CRR) : To control inflation, the central bank raises the CRR which reduces the lending capacity of the commercial banks. Consequently, flow of money from commercial banks to public decreases. In the process, it halts the rise in prices to the extent it is caused by banks credits to the public. Open Market Operations: Open market operations refer to sale and purchase of government securities and bonds by the central bank. To control inflation, central bank sells the government securities to the public through the banks. This results in transfer of a part of bank deposits to central bank account and reduces credit creation capacity of the commercial banks
What has the author A Vanags written?
A. Vanags has written: 'Inflation, exchange rates and central-bank policy in a transition economy' 'The spatial peak-load of mass transit networks'
What is the main idea of monetarianism?
Monetarism is a school of economic thought that emphasizes the role of government control over the money supply to achieve economic stability and growth. It argues that fluctuations in the money supply are the primary cause of economic fluctuations, and advocates for central bank intervention to control inflation and stabilize the economy.
What is monetry policy?
Defination: Monetary policy is the oldest policy for the economic stability. It is a policy which is adopted by the central bank of the country to control the supply of money: We can say that all those methods which are adopted by central bank, of the country to control the supply of money are called the monetary policy. In simple words, monetary policy means monetary management. In the words of Harry G. Johnson, "It is a policy of central bank to control the supply of money with the aim of achieving macroeconomic stability". Tools Of Monetary Policy They are classified into 1. Quantitative Methods 2. Qualitative Methods 1. Quantitative Methods: They consists of those methods which Physically affect the amount of credit creation in the economy. They are as: 1) Changes in Bank Rate Policy or Rediscount Rate: The rate at which the central bank of the country gives loans to commercial banks is known as Bank Rate or re-discount rate, In Pakistan; State Bank charges 10% as bank rate. By changing such rate of interest, the central bank can influence the supply of money in the country. To control inflation the central bank increases the rate of interest. The commercial banks will also increase their rate of interest. Accordingly, the loans will decrease, investment, output and prices will fall. In this way, inflation will be controlled. Now, we assume that the country is facing deflation. To remove deflation central bank will decrease the bank rate, the commercial banks will also decrease the rate of inl91'Cst. In this way, people will get more loans. Investment production, employment and Prices will start rising up. Accordingly, deflation will be controlled. Limitations: But the success of the bank rate policy depends upon * The fact that how flexible is the economic system. How rapidly, there will be the effect of bank rate on other variables of the economy, like prices, wages, Interest and output, etc. * Commercial banks should abide by the instructions of the central bank. If the central bank brings changes in the rate of interest, the commercial banks should also change the rate of interest. * If commercial banks already have excess reserves then commercial banks will not depend upon central bank. It this way, they will not care for changes in the rate of interest from central bank. * If economic activity is flourishing or economy is having boom, then the business class will be prepared to pay even higher rate of interest and inflation will not to be controlled. 2) Open Market Operation .. This is the second instrument of the monetary policy. Under this technique, the central bank sells or purchases 'government securities. If the central bank finds that commercial banks are providing excessive loans which are creating inflation. To remove the inflation, the central bank sells the government securities. The commercial banks will purchase these securities to earn interest against such securities. In this way, the resources of commercial banks will go down. They will advance less loans. Accordingly, the inflation will be controlled. If there is deflation in the economy. To control the deflation, the central bank purchases the government securities. Then the monetary base of the commercial banks will increase their loaning power will increase. As a result, investment will increase, income and prices will go up. LimitationsThe problem is that, in most of the countries the money market is not organized where the securities could be sold or bought. The funds which are collected through sale of government securities should not be spent on unproductive fields. 3) Changes in Reserve Requirements Each commercial bank has to keep a certain proportion of its deposits in the form of reserves just to meet the demands of the depositors. As in the case of Pakistan, each commercial bank has to keep 30% of its deposits to meet the needs of its depositors. The central bank can influence this reserve rate. If the central bank realizes that the commercial banks are advancing excessive loans, it will increase the reserve requirements. Accordingly, commercial banks could advance less loans. On the other hand, in deflation, if the central bank reduces the reserve requirements, the commercial banks will be able to advance' more loans. Hence, deflation could be removed. 4) Changes in Reserve CapitalEach commercial bank has to keep a certain ratio of its deposit with central bank. In case of Pakistan, each commercial bank has to keep 5% of its deposit in the central bank. By changing the reserve capital, a central bank can control the supply of money by commercial banks. When there is inflation in the economy. To remove this inflation, the central bank will increase the reserve ratio. As a result, lending of commercial banks will fall. As a result the supply of money will decrease. On the other hand, if central bank decreases the 'reserve ratio, the commercial banks will be having more funds to advance. Accordingly, the deflation could be controlled. 5) Changes in Marginal Requirements Commercial banks do not give loans against leaves, rather they ask for pledges to make. How much a person will have to pledge is settled by the central bank. This is given the name of marginal requirement. The central bank can bring changes in the marginal requirements. If there is inflation in the economy, the marginal requirements will increase. In this way, people will get less loans. As a result, supply of money will decrease. During deflation the marginal requirements are decreased. Hence people will get more loans from the commercial banks. As a result supply of money will go up and deflation will be controlled. 6) Credit Ceiling/Rationing of Credit The central bank can issue directions that loans will be given to commercial banks upto a certain limit. As a result, the commercial banks-will be careful in advancing loans to the people. But this is a very strict method, hardly adopted by the central bank. Moreover, if the commercial banks are having other sources to borrow, they will not bother for this policy. 2) Qualitative Methods * Moral Suasion: It is concerned with just as a moral request by central bank to commercial banks that loans should not be given for unproductive fields which create inflation. Loans should not be given for speculative purposes and hoarding. But such like requests could be effective in the developed countries. * Consumers Credit Control: This instrument is applied during inflation. If the central bank wants to control the supply of money, it will issue directions to commercial banks that loans should not be advanced for consumption purposes or for consumer durables because they create inflation. * Direct Action: The instrument of direct action is concerned with the policy of central bank against commercial banks. It can refuse to give loans to commercial banks. The central bank will not advance loan to commercial banks for the sectors which create inflation. Moreover, if commercial banks do not follow the instructions of the central bank, It will refuse to lend commercial banks * Publicity: The central bank of the country is the overall in charge of economic stability of the country. Its aim is to protect the economy from inflation and deflation. For this purpose, it analyses the whole economy. It keeps an eye over the activities of the commercial banks. If the commercial banks are found advancing loans which create inflation, their activities will be unhealthy for whole economy. The central bank can black list such banks. Thus to avoid such bad reputation in' future, they will be careful in advancing loans. By: Shafaq Chohan
Why does the state bank of Pakistan issue treasury bills?
State bank of Pakistan issus T-bills for the in-take of money
What are the ways the central bank can control the activities of the commercial bank?
explain four ways in which the central bank esercises control over commercial banks
Why is the supply of money in an economy not solely determined by central bank?
The supply of money IS controlled by the central bank. However, in some countries the politicians interfere with the Central Bank.
What is the purpose of central bank act?
Inflation is the constant rise in the general price level. Inflation is the constant rise in the general price level.
