The tools of monetary policy

One of the central bank's (CB) primary responsibilities is to regulate the money supply and preserve the stability of prices in the economy

The open money market operation

Injection through reverse repo
Mop-up through repo
Long term liquidity management
Bai-Muajjal; Islamaic mode of deferred payment

When members of the public deposit money in a bank, banks and financial institutions (FI) create money by lending it to businesses

Bank deposits are amplified by the multiplier effect

One strategy for regulating the money supply is the legal reserve requirement

The country's central bank "injects" money when there is a shortage of liquidity in the economy by purchasing bonds and assets

When there is too much money floating about in the economy, the central bank of the nation will mop it up or suck it

Another, tool used by the CB is the discout rate. This is interest rate at which banks and FI borrows from the CB

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