5. Monetary policy: goals.

Goals of monetary policy are to promote maximum employment, inflation (stabilizing prices), and economic growth by using tools of monetary policy:

• Change of a rate of required reserves

• Change of a discount rate (refunding rate)

• Open market operations

The monetary policy is one of kinds of a stabilization policy directed on smoothing of economic fluctuations. The basic purpose of a monetary policy is the help to economy in achievement of the general level of production characterized by a full employment and stability of the prices. The central bank defines and carries out the monetary policy.

6. Bank’s consolidated balance sheet.

It allows banks to have a clear picture of the company’s financial health. The balance sheet normally is broken down into 2 main elements—assets, liabilities. Assets are valuable items that the bank owns and consist of the bank reserves and loans. Liabilities are valuable items that the bank owes to others and consist of the deposit liabilities to its depositors. Assets: securities (are government bonds which CB has purchased) and debts (treasury bills-short-term securities and treasury bonds-long-term securities).

Securities are government. Bounds which CB has purchased (treasury bills – sort-term period, treasury bonds – long-term period) On condition of open market main users of t is commercial banks and public. Functions:

• To finance past and present budget deficits

• To influence the size of commercial banks reserves and the ability to create money by lending.

• Liabilities

• 3 items: reserves of commercial banks, treasury deposits, federal reserves notes outstanding.

7. The reserve ratio. The discount rate.

• Open market operations (prefers to the buying and selling of government bonds and securities by CB.)

• The reserve ration (rising of reserve ratio increases the amount of requit reserve. And if banks loose excess reserves they find their reserve deficient and forsed to contract checkable deposits, money supply loe reserve ratio)

• Discount rate ( banks borrowing money from CB increases its reserves and enhancing its ability to extend credit)

8. Easy - money policy: essence and effects.

Recession and unemployment. Task to central bank:

• Increase agregate supply for money. CB should expend excess reserve of commercial bank.

Set of action that CB should do:

• Buy securities (in the open market) it expends bank reserve.

• Reduce the reserve ratio required to excess reserve-increase the size of money multiplier (ability to create money rises)

• Lowerthe discount rate induces the com. Banks to add to their reserves by borrowing from CB

9. Tight - money policy: essence and effects.

Charackterized by high level of inflation so CB should atend to decrease AD – high limitinf money supply.

Sould:

• Sell securities in the open-market- should reduce commercial banks reserves

• Increase the reserve ratio-strips comm banks of excess reserves- decrease money multiplier

• Raise the discount rate – discourages the comm banks from building up their reserves through borrowing at CB

This policy reduce the money supply to reduce spending and control inflation.