Monetary Policy
March 30th, 2017
Monetary policy is a tool used to control the money flow within a market. Monetary Policy also plays a
huge role in leveling out inflation and interest rates within the economy. A few instruments that the
monetary policy uses to do this are Cash Reserve Ratio, Statutory Liquidity Ratio and Repo AKA
Repurchase Rate & Reverse Repurchase Rate.
When looking at inflation, Cash Reserve Ratio (CRR) plays a major role. If cash ratio increases, then
banks must keep more money on hand and in return are restricted from granting more loans. According
to this week’s reading, the usefulness of the equation of exchange depends on velocity’s stability or at
least its predictability. The Feds goal is to avoid deflation, using the monetary policy and it’s tools helps
to ensure that. In regards to interest rates, when repurchase rate falls it makes taking loans from the
central bank much cheaper for the smaller banks. In return, banks will tend to offer loans at much lower
interest rates to investors. The Federal reserve typically adjusts the federal funds rate by buying or
selling short-term government securities. The asset purchases are known as Quantitative Easing. This
directly lowers long-term interest rates and indirectly raises bank reserves. According to this week’s