(2) What are the commonly used monetary policies?

Monetary policy refers to the actions taken by a central bank or other monetary authority to control the money supply and achieve macroeconomic goals such as price stability, full employment, and economic growth. There are several commonly used monetary policies, including:<br /><br />1. Open market operations: This involves the buying and selling of government securities in the open market to regulate the money supply. When the central bank buys securities, it injects money into the banking system, increasing the money supply. Conversely, when it sells securities, it withdraws money from the system, reducing the money supply.<br /><br />2. Reserve requirements: This refers to the amount of funds that banks are required to hold in reserve against deposits made by their customers. By changing the reserve requirements, the central bank can influence the amount of money that banks can lend. Lowering the reserve requirements allows banks to lend more, increasing the money supply, while raising the requirements restricts lending and reduces the money supply.<br /><br />3. Discount rate: This is the interest rate charged by the central bank when it lends money to commercial banks. By raising or lowering the discount rate, the central bank can influence the cost of borrowing and the money supply. A higher discount rate makes borrowing more expensive, reducing the money supply, while a lower discount rate makes borrowing cheaper, increasing the money supply.<br /><br />4. Interest on excess reserves: This refers to the interest rate paid by the central bank on the excess reserves held by commercial banks. By changing the interest rate on excess reserves, the central bank can influence the amount of reserves that banks hold and the money supply. A higher interest rate encourages banks to hold more reserves, reducing the money supply, while a lower interest rate encourages banks to hold fewer reserves, increasing the money supply.<br /><br />5. Quantitative easing: This is a non-traditional monetary policy tool used by central banks to stimulate the economy when traditional monetary policy tools are ineffective. It involves the central bank purchasing longer-term securities, such as government bonds or mortgage-backed securities, to increase the money supply and lower interest rates.<br /><br />These monetary policies are used individually or in combination to achieve the desired macroeconomic outcomes. The effectiveness of each policy depends on various factors, including the economic conditions and the transmission mechanism of the policy.