Ch Umer Mehmood 14117M Umer Hayat 14198M Bilal Kayani 14116Rehman Baig 13142Ayyaz Bashir 13217

GROUP MEMBERS

Monetary policy

What is monitory policy? The part of the economic policy

which regulates the level of money in the economy in order to achive certin objectives

In Pakistan the SBP controls the monitory policy.

It is announced twice in a year through which SBP control the flow of money in the economy

OBJECTIVES OF MONETARY POLICY

To achive price stability by controlling inflation and deflation

To promote and encourage economic growth of the economy

To ensure the economic stability at full employment or potential level of output

Ensure stability in the foreign exchange rate

Main instrument of monetary policy

Open market

Operation

Cash reserve ratio

Statutory liquidity

ratio

Other qualititive Measure

Bank rate policy

Tools

Monetary Policy Over View 2010-11

GDP growth rate at 3.7% for 2009 which was predicted to be 4.4%

Inflation rate touched 15.5% because fo easy monitory policy and in July 2012 it decreased to 11.3%

The bench mark Interest is 14% in july 2011 and 9.5% in oct 2012, which also decline.

Evaluation of the above Monetary measuresEconomy came back on track with growth rate moving above 2%

Economy remained in recession  throughout the turbulent times of the world

The economic activities are on a roll

The inflation however has been climbing higher and higher, but with the current growth rate of the economy, it can now be controlled

Tools:

General Controls . (Quantitative) Selective Controls. (Qualitative)

Quantitative :

Open market operations.

Reserve requirements.

Bank rate.

Statuary liquid ratio.(SLR)

Repo rate.

Reverse repo rate.(RRR)

Qualitative:

Moral suasion.

Consumer credit control.

Direct action.

Goals of monetary policy 

There are 5 basic goals of monetary policy 

Stability in the price level (low inflation)

High employment

Economic growth

Stability in the interest rate

Stability in the exchange rate

Open Market Operation

It refers to the buying and selling of Govt. securities in the open market .

During inflation SBP sells securities in the open market which leads to transfer of money to SBP.

Thus money supply is controlled in the economy.

Deficit Financing

It means printing of new currency notes by State Bank Of Pakistan.If more new notes are printed it will increase the supply of money thereby increasing demand and prices.

Thus during Inflation, SBP will stop printing new currency notes thereby controlling inflation.

Issuance of New currency

PROS AND CONS OF MONETARY POLICY

pros

he main purpose of a contractionary monetary policy is to slow down the rampant inflation that accompanies a booming economy.

The government uses several methods to do this, including slowing its own spending.

The Fed can raise interest rates, making money more expensive to borrow. Slowing inflation by reining in economic

cons

Production is reduced in the economy as a by-product of slowing the economic engine.

More expensive investment capital and a reduced demand for products and services are the culprits.

Once companies gear down production, it can take years to ramp it up again.