Three tools of monetary policy and their policy effects

Monetary policy is one of the important means of national macro-control, and the three tools of monetary policy are deposit reserve, open market business and rediscount.

1, open market business. The so-called open market business refers to the central bank buying and selling government bonds in the open market to increase or decrease the base currency. Open market business is the most commonly used means for the central bank to stabilize the economy, and it is also the most flexible policy means.

2. rediscount rate. Under normal circumstances, the loan from the central bank to commercial banks is called rediscount, and the loan interest rate from the central bank to commercial banks is called rediscount. The central bank can change the rediscount rate according to the economic situation.

3. Statutory reserve ratio. The statutory reserve ratio is the ratio of reserve to deposit required by the central bank. The central bank affects the money multiplier by changing the statutory reserve ratio, thus affecting the money supply.

The application of the three major monetary policies

1, open market. When the economy is in recession, the central bank buys government bonds in the open market, increases the base money, and stimulates the economy by increasing the social money supply by several times through the money multiplier. On the other hand, when the economy is overheated, the central bank sells government bonds in the open market, reduces the base currency and withdraws the currency, thus cooling the economy.

2. rediscount rate. When the monetary authorities think that the total expenditure is insufficient and the unemployment tends to increase continuously, they will lower the rediscount rate and expand the rediscount quota to encourage commercial banks to issue loans and stimulate investment. The decrease of rediscount rate means that the monetary authorities should expand the supply of money and credit, while the increase of rediscount rate means that the monetary authorities should shrink the supply of money and credit.

3. Statutory reserve ratio. When the monetary authorities think that the total expenditure is insufficient and unemployment continues to increase, they can reduce the statutory reserve ratio and increase the money multiplier, thus increasing the money supply and stimulating the economy. On the contrary, when the monetary authorities think that the total expenditure is too much and the price level has a trend of continuous growth, they can raise the statutory reserve ratio and reduce the currency multiplier.