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Module 5 - Monetary Policy - ECONOMICS II(ECON 102 Monetary...

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ECONOMICS II (ECON 102) Monetary Policy Module 5 10/23/15 1 Prepared by: Ms.Rubeena Mahaboob and Ms.Sufia Khan
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What is Monetary Policy? Monetary Policy is the attempt to control inflation and moderate the business cycle by changing the quantity of money in circulation and adjusting interest rates and the exchange rate. Monetary policy is conducted by a nation's central bank. 10/23/15 2
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Central Bank A Central Bank is a public authority charged with regulating and controlling a country’s monetary and financial institutions and markets. It is an institution designed to oversee the banking system and regulate the quantity of money in the economy. The central bank is also responsible for the nation’s monetary policy. Examples for Central Bank are US Federal Reserve System Bank of England SAMA (Saudi Arabian Monetary Agency) Reserve Bank of India(RBI) 10/23/15 3
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The Role of the Central Bank The Central Bank has many responsibilities. These responsibilities fall into three categories: 1. Financial System Stability 2. Conduct of Monetary Policy 3. Other Monetary Management Tasks 10/23/15 4
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1. Financial system stability First we will try to understand what is financial system? Financial system : It is the system that allows the transfer of money between savers and borrowers. It comprises of a set of complex and closely interconnected financial institutions, markets, instruments and services. Financial institutions are the establishments that focuses on dealing with financial transactions, such as investments, loans and deposits. They are composed of organizations such as banks, trust companies, insurance companies and investment dealers. Financial instruments are the documents such as a check, draft, bond, share etc that has a monetary value. Financial services are facilities such as savings account, leasing, money transfer provided generally by banks. 10/23/15 5
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1. Financial system stability Financial system stability is the ability of the financial system to absorb internal and external shocks, be it economic, financial or political. The central bank has responsibility for overall financial system stability. The central bank requires other banks: a. To keep themselves in a sound financial position. b. Not to cause or promote instability in the country’s financial system. c. To act with integrity, prudence and professional skill. 10/23/15 6
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1. Financial system stability a. To keep themselves in a sound financial position. Sound financial position is the sound status of the assets (cash), liabilities and owner’s equity and interrelationships. These are reflected in their financial statements. 10/23/15 7
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1. Financial system stability b. Not to cause or promote instability in the country’s financial system.
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