1.1.1 Decrease the amount of required reserves the
bank must keep where the need for savings of
financial institutions in the central bank will
1.1.2 The liquidity state of financial institutions will increase
and this would increase the ability of banks or other
financial intermediary to provide loans to public.
1.2 Reduce Minimum Requirements of
1.2.1 The lesser the required liquidated assets
that are held, the more the credit that
can be created.
1.2.2 The required minimum liquidated assets are
fixed by Bank Negara Malaysia and are used
as a monetary policy tool to control the
Malaysian economic stability.
1.3 Buy Government Securities in the Open
1.3.1 Definition of Open Market Operation: The buying and
selling of government securities the open markets by
central bank to influence the side of commercial
1.3.2 The central bank will buy government securities from
commercial banks and individuals . The payment made
will increase cash reserves of commercial banks and
thus, commercial banks can create more credit.
1.3.3 There will be more spent by the public in the
economy. The money from sales can be used by
the government to sustain its expanses when its
expenditure exceeds revenue from taxes collected
1.4 Decrease Bank Rate or Discount
1.4.1 Bank rates will be reduced as more money needs to be pumped
into the economy. Lower bank rates means that the cost of
borrowing is lower, thus more will borrow and more loans
approved. Consequently,the flow of money from the commercial
bank to public sectors increases.
1.4.2 If discount rate is reduced, the need for savings of
financial institutions in the central bank will fall. The
liquidity state of financial institutions will increase and
this will allow the financial institutions to provide more
loans to public.
1.5 Reduce Interest Rate
1.5.1 Commercial banks will reduce the level of
savings and increase purchase of goods and
services from public.
1.5.2 Example: A reduction of interest rate on
fixed deposits from 10% to 4%, will result in
consumers saving less and spending more