Question

if the strategy is formulated, what monetary tool is most useful? explain your choice.

Answer 1

Sol :

Monetary Tool means the tool of the central bank to control the inflation or deflation in the market.

These are of various types :

• Discount Rate
• Interest Rate
• Open Market Operation
• Fed's Fund Rate

Open market operation is the most useful tool of the monetary policy.

Open market operation means buying and selling of securities by the central bank to the public.

It is most useful because of two reason :

• It directly effect the money supply. Money supply increases when central bank buys the securities and decreases when sell the same.
• And , also it is flexible.