Monetary Policy to Combat Unemployment

Amelia Edreena A
Mind Map by Amelia Edreena A, updated more than 1 year ago
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Mind Map on Monetary Policy to Combat Unemployment, created by Amelia Edreena A on 02/13/2015.

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Monetary Policy to Combat Unemployment
1 Quantitive Expansionary Monetary Policy
1.1 Reduce Minimum Statutory Reserve Requirement
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 decrease.
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 Liquidation Assets
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 Market Operation
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 banks' deposits.
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 (G>T).
1.4 Decrease Bank Rate or Discount Rate
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
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