What are the tools of monetary

What are the tools of monetary control used by central banks,such as the Bank of England, the European Central Bank? Why cannotcentral banks fully control the money supply
If the central bank wants to increase the money supply withoutright open-market operations, what does it do?
pleae qicly

Answer:

The Central Bank is established with the view of controlling thesupply of money and giving directives on banking operations tocommercial banks at large. These Banks directly control the supplyand demand of money with the various tools that they possess.

The same are described as follows: –

1) Cash Reserve Ratio: –

Commercial banks require to keep a part of their deposits assecurity with the Federal Reserve which they have to maintain tocontinue operations. For example, if the cash reserve ratio is 10%,and a deposit of 100$ is made with the commercial banks, then only90$ can be used by the bank to generate loans.

Now, supposing there is recession in the economy which atpresent is the scenario due to the Corona Virus Pandemic. TheFederal Reserve then reduces the cash reserve requirements. As aresult, the currency in circulation increases and people can geteasier access to funds which increases the aggregate demand and theeconomy returns back to its normal position.

On the contrary, during an inflation cycle the exact opposite ofthis takes place.

2) Interest Rates: –

Interest Rates are another common way in which the Central Bankof a nation can impact the flow of currency in circulation. TheCentral Bank provides interest to commercial banks on the reservesthey hold with the Central Banks. It also provides loans tocommercial banks so that they can procure money and supply to loantakers as and when required by the bank.

For example, when there is inflation in the economy, the flow ofmoney in such an economy is high. If the Central Bank thenincreases the interest rates on loans, the commercial banks thenusually start charging higher interest rates from the customers aswell. The resultant of which is that the aggregate demand in aneconomy contracts and the money in circulation is reduced.

3) Open Market Operations: –

Open market operations are when the central bank themselveschose to purchase or sell bonds of a certain value in the market.When the Federal Reserve purchases bonds, the sellers pay a pricefor the same and it reduces the supply of money by the same. On thecontrary, if the federal reserve sells bonds, it gives payments tothe seller and in return the monetary base expands.

Thus, during a recession cycle, the Central Bank purchases bondsand increases the supply of money as sellers receive the money andcan then spend the same on various profit-making avenues. Forexample, if a bank receives this money it would give out moreloans.

Why Central Banks cannot control the supply of moneyfully?

The central bank can only control the above-mentioned itemswhich may or may not have a direct impact on the currency incirculation. This is because directly the bank cannot ask peoplenot to save more money or lesser money and neither can it forcebanks to give away more loans.

It is up to the discretion of the banks, if or not they want togive away loans or not and also in case of people, it is up to themwhether them want to or don’t want to save money as a result ofinterest rate changes.

This is the exact reason why it does not control the supply ofmoney fully.

Please feel freeto ask your doubts in the comments section.


 
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