FREE IGNOU BECC-133 SOLVED ASSIGNMENT 2023-24
10. Instruments of Monetary Policy: Monetary policy refers to the actions taken by a central bank to influence the money supply and interest rates in order to achieve macroeconomic goals. Various instruments are used to implement monetary policy:
- Open Market Operations (OMO): The central bank buys or sells government securities to control the money supply. Purchases increase the money supply, while sales decrease it.
- Reserve Requirements: Central banks mandate the amount of reserves that banks must hold against their deposits. Increasing reserve requirements reduces the money supply, and vice versa.
- Discount Rate: The central bank sets the interest rate at which commercial banks can borrow funds from the central bank. A higher discount rate discourages borrowing and reduces the money supply.
- Interest on Reserves: Paying interest on reserves held by banks at the central bank can influence their willingness to lend and borrow in the interbank market.
- Forward Guidance: Central banks communicate their intentions regarding future monetary policy, which can influence market expectations and interest rates.
- Quantitative Easing (QE): The central bank buys long-term securities to lower long-term interest rates and stimulate economic activity.
- Targeting Exchange Rates: Some central banks intervene in the foreign exchange market to influence the exchange rate of their currency.
Each of these instruments affects the money supply, interest rates, and overall economic activity. Central banks use these tools to achieve goals such as price stability, full employment, and economic growth.
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