Question

Explain how central banks traditionally conducted monetary policy (before the GFC) to meet its objectives.

Answer 1

Sol: Central banks conducted monetary policy to meet its objective specially by controlling its monetary supply in open markets.For eg, central banks can sell bonds & generate money from commercial banks to reduce its money supply.Such type of open market activities converts short term interest rate into long term interest rates & further into an economic operation.This ensures central banks to achieve & manage its price stability & economic fluctuations.