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Pakistan ‘s monetary policy Presented by: Ambreen Jaseem Farooq Anjum LOGO outline 1 Brief introduction 2 Reserve requirement 3 Interest rate 4 Open market policy 5 Brief conclusion www.themegallery.com Brief introduction Definition: government actions to increase or decrease the money supply and change banking requirements and interest rates to influence banker’s willingness to make loans. www.themegallery.com Brief introduction Government, central bank, monetary authority ↓ the supply of money availability of money cost of money rate of interest ↓ Objective: the growth and stability of the economy www.themegallery.com Brief introduction Expansionary policy: increase the total money supply, combat unemployment, lower interest rates Contractionary policy: Decrease the total money supply, Combat inflation, Raise interest rates www.themegallery.com Tools of monetary policy Reserve requirement Interest Open rate market policy www.themegallery.com Reserve Requirement (or Required Reserve Ratio) www.themegallery.com Definition The reserve requirement (or required reserve ratio) is a bank regulation that sets the minimum reserves each bank must hold to customer deposits and notes. www.themegallery.com Reserve Requirement Changes Affect the Money Stock Increasing the reserve requirement Reducing the volume of deposits Reducing the money stock and raises the cost of credit www.themegallery.com Part 2: Effects: Reserve Requirement Changes Affect the Money Stock Decreasing the ratios Expansion of bank credit and deposit levels and a decline in interest rates www.themegallery.com Situation in Pakistan Pakistan has raised its reserve requirment ratio ten times in 2007. 8.5% 10% 11.5% 13.5% 9% 9.5% 10.5% 11% 12% 12.5% 14.5% www.themegallery.com To maintain the stability of the value of the currency Effects To control the currency flow, restrain inflation To promote the economic growth. www.themegallery.com The importance of interest rate in money policy 1.Interpreting the term structure 2.Interpreting the term structure www.themegallery.com The influnce of changes of interest rate www.themegallery.com www.themegallery.com 1. Inflation 2. Investment 3. Consumption 4. Pressure of foreign exchange www.themegallery.com Discount rate and rediscount rate discount rate :a kind of interest rate.when individuals or industries exchange the commercial paper (商业票据)for cash with the commercial bank before its due date, the bank will take off some interest from the amount of money the commercial paper represents and the individuals or industries get the rest of money. And the interest rate the bank uses is called the discount rate. -------something to do with time value of money www.themegallery.com What’s the time value of money? 2007 10 yuan 2 bars of chocolate 2008 10 yuan only 1 bar of chocolate As time goes by ,the value of money decreases.---the so called time value of money www.themegallery.com How the discount rate influences the value of money? 10 yuan=10*(1+10%)=11 yuan (2007) (2008) 9.1yuan=9.1*(1+10%)=10yuan (2007 ) (2008) 10 yuan =10*(1+10%)(1+10%)=12.1 yuan (2007) (2009) In 2007,we can buy 2 bars of chocolate with 10 yuan , while in 2008, we have to pay 11 yuan for the same 2 bars of chocolate. the value of money actually decreases↓ www.themegallery.com Rediscount rate Individua ls or industrie s Commerci al banks Central bank www.themegallery.com rediscount rate today mainly refers to the interest rate the central bank charges commercial banks when they borrow money from the central bank. www.themegallery.com The function of rediscount rate Rediscount rate ↑ commercial banks’ interest rate on loan↑ individuals’ tendency to borrow money ↓ cash flow in society↓ investment of individuals and industries ↓ economy get controlled www.themegallery.com some figures of China’s rediscount rate from 1993 to 2003. 1993 1994 10.8 10.8 1995 1996 1997 10.44 9 8.55 1998 1999 2000 4.59 3.24 3.24 2001 2002 2003 3.24 2.7 2.7 www.themegallery.com Open Market Operation www.themegallery.com Outline Definition of open market operation Classification of open market operation Importance of open market operation Specific operations and Impact of open market operation—how is open market operation conducted China’s open market operation in 2008 www.themegallery.com What is open market operation? Open market operations are the means of implementing monetary policy by which a central bank controls its national money supply by buying and selling government securities, or other financial instruments. Monetary targets, such as interest rates or exchange rates, are used to guide this implementation. www.themegallery.com Importance of open market operation controlling the money supply achieving and maintaining a fixed exchange rate with relation to some foreign currency guiding the trend of interest rates in the currency market www.themegallery.com Central Bank Bill Central Bank Bill is short-term bond issued by The People’s Bank of China to retrieve the fundamental currency. The expiration of Central Bank Bill is characterized as handing the fundamental currency out. www.themegallery.com Pakistan’s open market operation in 2008 The principal guidance is to control the inflation and 1.preventing money supply from increasing too rapidly 2.quickening the revaluation of foreign exchange rate 3.raising the interest rates www.themegallery.com conclusion An independent and effective monetary policy is essential for effective economic management in Pakistan. www.themegallery.com Cl i c k t o e d i t co mp a n y s l o g a n . LOGO