Essay on control of money supply.

1. Presented by-
Suparna pani
CONTROL OF MONEY
SUPPLY

2. INTRODUCTION
•In economics, money supply is the total amount
of monetary asset available in an economy at a
specific time
•However if supply of money is not carefully
controlled, it can have a negative effect on
economic growth
•If there is excess supply of money then the result
will be inflation whereas tight control over
money may cause depression and unemployment
•So, monetary policy is implemented by central
bank to control total money supply

3. GRAPHICALLY
•The supply curve for
money illustrate the
quantity of money supplied
at a given interest rate
•Supply curve for money is
vertical because it does not
depend on interest rate
rather it is decided by
central bank

4. THREE IMPORTANT TOOLS TO CONTROL MONEY
SUPPLY
• Open market operation
•The required reserve ratio
•The discount rate/bank rate

5. OPEN MARKET OPERATION
• OMO is a monetary policy tool in which central bank buy and
sell bonds to regulate the money supply in the economy
• Security trading is one of the quickest and most effective way
to control economic activity
• Open market purchase: If central bank want to increase the
money supply it purchase government securities due to this
amount of cash with commercial bank and people increase.
Its done to control recession (expansionay policy)
• Open market selling: If central bank wants to reduce money
supply it sells government securities to commercial bank and
people which will reduce the cash with commercial bank.This
will decrease the number of loans whereas people’s demand
for goods and services shrinks.. Its done to control inflation
(contractionary policy)

6. THE REQUIRED RESERVE RATIO
•Reserve requirement is the percentage of
deposits bank must hold in reserve by law
RR ↓ SM ↑
RR ↑ SM ↓

7. BANK RATE
•Bank rate is the minimum rate at which central bank
provide loan to the commercial bank
•They can either borrow from other bank or can
borrow from central bank. The rate they paid in
central bank is the discount rate
•BR ↓ SM ↑ (Expansionary policy in order to curb
recession)
•BR ↑ SM ↓(Contractionay policy in order to curb
inflation)

8. MORE PREFARABLE TOOL IS
Open market operation is more preferable than the
other two tool because:
• OMO are flexible
• OMO are reversible
• Quick implementation
The drawback of bank rate is that many bank not
prefer to borrow money from central bank unless
absolutely necessary and changing required reserve
ratio is like trying to use a sledgehammer on
economy which affect every member of bank

9. OTHER TOOLS
• Rationing of credit:
Central bank uses credit rationing to fix the credit ceiling allowed for each
and every commercial bank
• Regulation of margin requirement:
Every commercial bank has to keep a margin whenever it extent loans
against security
• Regulation of consumer credit:
This method is used by government or central bank to implement certain
regulation on goods sold on credit
• Moral suasion:
Central bank morally persuades or request the commercial bank not to indulge
themselves in such economic activities which are against the interest of country
• Publicity:
Central bank also publishes details concerning its policies and important
information
• Direct action:
It the last resort through which central bank take a direct action against
the bank which does not act in accordance with the policy of central bank

10. THANK YOU