We are here with you hands in hands to facilitate your learning & don't appreciate the idea of copying or replicating solutions. Read More>>

Looking For Something at vustudents.ning.com? Click Here to Search

www.bit.ly/vucodes

+ Link For Assignments, GDBs & Online Quizzes Solution

www.bit.ly/papersvu

+ Link For Past Papers, Solved MCQs, Short Notes & More


Dear Students! Share your Assignments / GDBs / Quizzes files as you receive in your LMS, So it can be discussed/solved timely. Add Discussion

How to Add New Discussion in Study Group ? Step By Step Guide Click Here.

Total Marks = 5

A news story titled as “Monetary policy: State Bank cuts benchmark interest rate to 10%” has been published in The Express Tribune dated October 06, 2012. The story provides the information about the reduction of benchmark interest rate from 10.5% to 10% by State Bank of Pakistan. The complete news story can be studied at the following link:

http://tribune.com.pk/story/447744/monetary-policy-state-bank-cuts-benchmark-interest-rate-to-10/

 

Some experts are of the view that this decrease in interest rate will be very beneficial for the economy while others are opposing this new policy of State Bank of Pakistan.

Required:
Being a student of Money & Banking, you are required to discuss in your own words whether this decrease in discount rate will be helpful for the economy or not? Your opinion must be supported by logical reasoning.

Important Instructions:

 

1. Your discussion must be based on logical facts.

2. The GDB will remain open for  3 working days.

3. Do not copy or exchange your answer with other students. Two identical / copied comments will be marked Zero (0) and may damage your grade in the course.

4. Obnoxious or ignoble answer should be strictly avoided.

5. Questions / queries related to the content of the GDB, which may be posted by the students on MDB or via e-mail, will not be replied till the due date of GDB is over.

 

+ How to Follow the New Added Discussions at Your Mail Address?

+ How to Join Subject Study Groups & Get Helping Material?

+ How to become Top Reputation, Angels, Intellectual, Featured Members & Moderators?

+ VU Students Reserves The Right to Delete Your Profile, If?


See Your Saved Posts Timeline

Views: 1490

.

+ http://bit.ly/vucodes (Link for Assignments, GDBs & Online Quizzes Solution)

+ http://bit.ly/papersvu (Link for Past Papers, Solved MCQs, Short Notes & More)

+ Click Here to Search (Looking For something at vustudents.ning.com?)

+ Click Here To Join (Our facebook study Group)

Replies to This Discussion

Please Discuss here about this GDB.Thanks

Our main purpose here discussion not just Solution

All students must share points and also your problems.... so it can discussed and solution can prepare.

Don’t wait for solutions just participate in Discussions because after discussions a correct solution will prepare...

solution ::::::::::::::::::::::::::::::::::


The discount rate is the interest rate that Federal Reserve Banks charge when commercial banks borrow reserves. In principle, a decrease in the discount rate encourages banks to borrow, which increases the amount of available reserves held by the banking system, which then induces an increase in the money supply and a decrease in interest rates. An increase in the discount rate works in the opposite direction, discouraging borrowing, reducing available reserves, decreasing the money supply, and increasing interest rates.
Although the Fed, in principle, can use the discount rate to control the total quantity of money in circulation, in practice, the discount rate is used primarily as a signal for monetary policy actions undertaken through open market operations.

In the early years of the Federal Reserve System, before the emergence of modern financial markets, the discount rate was the primary tool of monetary policy. At that time reserve lending subject to the discount rate was the most effective means available for the Fed to control the amount of bank reserves and thus the money supply.

In modern times, the discount rate is simply less effective in controlling the amount of reserves held by banks than open market operations. Banks borrow reserves from the Fed for reasons beyond the discount rate, meaning a higher or lower discount rate might have very little impact on reserves and the money supply.

mgt411 3rd gdb solution 2013


The discount rate is the interest rate that Federal Reserve Banks charge when commercial banks borrow reserves. In principle, a decrease in the discount rate encourages banks to borrow, which increases the amount of available reserves held by the banking system, which then induces an increase in the money supply and a decrease in interest rates. An increase in the discount rate works in the opposite direction, discouraging borrowing, reducing available reserves, decreasing the money supply, and increasing interest rates.
Although the Fed, in principle, can use the discount rate to control the total quantity of money in circulation, in practice, the discount rate is used primarily as a signal for monetary policy actions undertaken through open market operations.

In the early years of the Federal Reserve System, before the emergence of modern financial markets, the discount rate was the primary tool of monetary policy. At that time reserve lending subject to the discount rate was the most effective means available for the Fed to control the amount of bank reserves and thus the money supply.

In modern times, the discount rate is simply less effective in controlling the amount of reserves held by banks than open market operations. Banks borrow reserves from the Fed for reasons beyond the discount rate, meaning a higher or lower discount rate might have very little impact on reserves and the money supply.

MGT411 3 GDB solution

The economy can be influenced easily by interest rates. When interest rates are high, people do not want to take loans out from the bank because it is not easy to pay the loans back, and the number of purchases of cars and homes goes down.

The effects of a lower interest rate on the economy are very favorable for the consumer. When interest rates are low, people are more likely to take loans out of the bank in order to pay for things like houses and cars. When the market for those things gets strong, price decreases and more people can purchases these things.

If the discount rate is higher, then banks borrow fewer reserves. If the discount rate is lower, then banks borrow more reserves. Change in reserves induces banks to change its lending activity. With more reserves, banks are willing to make more loans. With fewer reserves, banks are willing to make fewer loans. The change in bank lending affects the creation of checkable deposits, which are an important component of the money supply. More loans mean more deposits and an increase in the money supply. Fewer loans mean fewer deposits and a decrease in the money supply. The change in bank lending also affects interest rates. The effects of a lower interest rate on the economy are very favorable for the consumer. When interest rates are low, people are more likely to take loans out of the bank in order to pay for things like houses and cars. When the market for those things gets strong, price decreases and more people can purchases these things. If banks are willing to lend more, and then interest rates fall. If banks are willing to lend less, then interest rates rise. The end result of a change in the discount rate is a change in the money supply and a change in interest rates. Should the Fed decide that the economy is in or heading toward a recession, then it is inclined to lower the discount rate and implement expansionary monetary policy.

Regards
IKRAM BUTT PAKPATTAN BBA 6th semester

The effects of a lower interest rate on the economy are very favorable for the consumer. When interest rates are low, people are more likely to take loans out of the bank in order to pay for things like houses and cars. When the market for those things gets strong, price decreases and more people can purchases these things. If banks are willing to lend more, and then interest rates fall. If banks are willing to lend less, then interest rates rise. The end result of a change in the discount rate is a change in the money supply and a change in interest rates. Should the Fed decide that the economy is in or heading toward a recession, then it is inclined to lower the discount rate and implement expansionary monetary policy. 

The discount rate is the interest rate that Federal Reserve Bank charge when commercial banks borrow reserves. In principle, a decrease in discount rate encourages banks to borrow, which increase the amount of available reserves held by the banking system, which than induces an increase in the money supply and decrease in interest rates. An increase in the discount rate works in opposite direction, discouraging borrowing, reducing available reserves, decreasing the money supply, and increasing in interest rates.

by reducing interest rate will impose positive impact on economy. discount rate is the interest rate which state bank charging to commercial banks. commercial banks lend this money to investor with value add cost. investors invest this money in the economy which speed up by this injections. but it put negative affect on CPI and inflation rate get increased as well due to too much circulation on money in general public.

I think policy rate is the major instrument in the hands of SBP.Currently the policy rate is high.By maintaing a high policy rate SBP is containing the hyper inflationan.However,its side effect is that higher interest rate decreases growth and investment.There is a trade off.However currently it is more favorable to have higher policy rate.

firstly the policy rate which u mentioned in my thinking is the interest rate. the central bank main goal is to control money supply. the control of money supply can be done through two major instruments. first is interest rate and second is open market operations.

now coming to ur question regarding interest rate, if central bank thinks that there is too much money circulationg in economy, then it can increase the interest rate. this increase in interest rate makes holding of money expensive in people hands because u can earn interest by depositing it in bank rather than to just keep it in ur hands. thus holding of money in hand is not feasible so people deposit it in commercial banks. thus money in circulation reduces which simply means lower prices levels. this is the plus point.

but the minus point is that, when investors try to get funds from commercial banks, then banks give this money to investors at a higher interest rate. thus it becomes expensive for investors to get funds from bank. which in turn results in lower investment. the low investment in the economy in turn results in lower economic activity which reduces growth.

it becomes simple if u try to relate the impact of policy on several key indicators.

hope this post will help you to understand the various tools of monetary policy. Tools and their applicability with respect to various monetary instances:

Monetary Policy tools---------Contractionary Policy-----------Expansionary Policy
1) Bank Rate-------------------------Increase--------------------------Decrease
2) Open Market Operation-----------Sell Bonds------------------------Buy Bonds
3) Cash Ratio-------------------------Increase--------------------------Decrease
4) Liquidity Ratio---------------------Increase--------------------------Decrease
5) Special deposits-------------------Increase--------------------------Decrease
6) Funding----------------------------Long-Term Loans----------------Short-term Loans
7) Hire Purchase Regulations----High downpayments and short repayment period---Long downpayments and long repayment period
8) Moral Suasion---------------------Strict and Restrictive-------------Liberal
9) Special Directives-----------------Strict and Restrictive-------------Liberal

Policy rate refers to bank rate or more commonly known discount rate. Discount rate with reference to central bank tool is the rate at which commercial banks are charged for the funds which they borrow from central bank in case of liquidity shortage. Commercial banks try SBP window when they are in need of liquidity/funds. The rate which SBP charges to commercial banks has ultimate effect on the lending rates of the commercial banks because as per cost-benefit rule banks calculate their spread (Difference between borrowing rate and lending rate) and charge similarly to the general public when they lend funds. Normally SBP sets high discount rate to discourage commercial banks to visit SBP discount window. This is aimed at encouraging commercial banks to take efforts to mobilize funds from the surplus units of the economy i.e. depositors who are having surplus funds and to channelize these funds through financial intermediation process to the deficit units i.e. those who are in need of funds for either consumption or for investment purpose.

Normally, it is assumed that varying discount rate can better affect the consumption patterns of the society i.e. through curtailing or enhancing purchasing power of the public. SBP uses this tool to arrest the rising inflation. But at times this tool fails when market mechanism doesn't respond with all its elastic laws. Effectiveness of this tool depends on the commercial banks' response too. Suppose SBP increases discount rate to contract money supply in the country but banks borrow these funds from SBP on high discount rate and they do not incorporate the high discount rate effect in their lending rates to the general public/investors in this case commercial banks book huge losses or reduction in their huge profits on their financial statements but the real trickle down effect is not achieved which was the target of SBP. This was the case with our economy in last few months. Apart from this factor there were numerous factors but we are limiting this discussion only on discount rate.

RSS

© 2020   Created by +M.Tariq Malik.   Powered by

Promote Us  |  Report an Issue  |  Privacy Policy  |  Terms of Service

.