Monetary Policy (Assignment)
Monetary Policy (Assignment)
Monetary Policy (Assignment)
MONETARY POLICY
ON THE ECONOMY OF
PAKISTAN
GROUP MEMBERS:
ZIAD ASGHAR
B-16703
B- 18992
B-18993
currency. The monetary policy aims at maintaining the relative stability in the
exchange rate. The RBI by altering the foreign exchange reserves tries to influence
the demand for foreign exchange and tries to maintain the exchange rate stability.
Types of Monetary Policies used in Pakistan:
1) Expansionary Monetary Policy
Expansionary monetary policy is appropriate when the economy is in recession and
unemployment is the problem. The goal of expansionary monetary policy is to
reduce unemployment. Therefore the tools would be an increase in money supply.
To increase the money supply the federal government can:
1) By government bonds
2) Lower the interest rate
3) Lower the reserve ratio
prices of its goods or services in order to overcome the higher rate of interest thus
it would result in an increase in inflation all over the country .
Similarly, it would have also have a significant impact on Deposits. Higher interest
rate on deposits means that it would encourage more number of people to store
their money in banks. It would attract a huge number of foreign investors thus
foreign investments would increase in Pakistan resulting in an overall
improvement in the economy of our country. The objective of monetary policy in
Pakistan, as laid down in the SBP Act of 1956, was to achieve the targets of
inflation and growth set annually by the government. On September 12, 2015 The
State Bank of Pakistan announced the new monetary policy for the next two
months reducing the interest rate further by 50 basis points. The central bank
reduced interest rate by 0.5 percent and brought it down to six percent. In line with
market expectations, the State Bank of Pakistan (SBP) decided to keep the policy
rate unchanged at 6% for the next two months. The policy rate is the benchmark
interest rate that helps determine the general cost of borrowing in the economy.
The SBP uses this monetary policy tool to achieve price stability and economic
growth targets. Lower interest rates put more borrowing power in the hands of
consumers and when consumers spend more, the economy grows, naturally
creating inflation. This reduction in interest rates by the State Bank of Pakistan is
an example of Expansionary Monetary Policy. Expansionary monetary policy is
used in Pakistan when the economy is in recession and unemployment is the
problem. It lowers the interest rates which increase the money supply as more
people now borrow money from the banks. It proves to be a significant factor in
regulating money in the country. Contractionary monetary policy is used in
Pakistan when the inflation is at its peak. In order to control inflation and rising
economy the interest rates are increased. This rising interest rates in turn will
encourage people to save more and borrow less thus reducing the amount of money
in circulation in the market. Lesser money in the market makes it difficult to buy
the goods and services thus slowing down the rise in price. Central bank in
Pakistan tend to either maintain or increase the benchmark interest rate at a time
when inflation is expected to rise. One of the major objectives of the monetary
policy in Pakistan is to encourage foreign investments which would in turn
improve the economy of the country. The monetary policy is implemented in a
way that ensures there is decent interest rate on deposits so that more and more
foreign businessmen and investors start investing their money in Pakistan which
definitely has a positive impact on the economy of Pakistan.