Monetary Policy Assignment

The central bank, currency exchange or any other regulatory authority ascertain the amount and growth rate of money supply, which has an effect on interest rates. The Monetary policy essentially involves such actions that would increase the rate of interest or change bank reserves. In other words, the amounts of money banks keep in their vaults.
Monetary policy is a macroeconomic policy of the central bank involving control of money supply and interest rate. It is based on the demand part of economic policy that a government uses to attain macroeconomic goals and objectives;

• inflation
• consumption
• growth and
• liquidity

for example. Monetary policy is among several ways that governments attempt at controlling the economy. If the supply of money grows rapidly, the inflation rate would increase, on the contrary, if the supply of money grows slowly then that would stall economic growth. In general, the purpose of monetary policy is to manage the amount of money in such a way so as to ensure that the requirements of the varied segments of the economy are met as well as increase the rate at which the economy grows.
Implementation of the monetary policy is accomplished by the central bank through

• open market operations
• bank rate policy
• reserve system
• credit control policy
• persuade morally and
• through many more instrument

The interest rate or the money supply would change if any of these instruments were to be used as an all-encompassing economic policy. There are two types of monetary policy; expanding and contracting. If money supply increases and interest rates are reduced then that is an instance of an expansionary policy. The opposite of that is a contracting monetary policy.
To fuel economic growth liquidity is vital. So that liquidity can be maintained, the central bank depends on the monetary policy. Through the purchase of bonds by open market operations, the central bank puts money in the economy thereby reducing the interest rate.
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