If there is excess liquidity and the economy is overheated, that is, the growth rate is too fast or the inflation rate is very high, we will adopt a tight monetary policy, that is, increase the deposit reserve ratio and rediscount interest rate, sell bonds in the open market and withdraw money.
If the liquidity is insufficient and the economic development is weak, we must adopt an expansionary monetary policy, that is, reduce the deposit interest rate, rediscount the interest rate, buy bonds in the open market and put money in.
Monetary policy, that is, financial policy, refers to various principles, policies and measures adopted by the central bank to control and regulate the money supply and credit quantity in order to achieve its specific economic goals. The essence of monetary policy is that the country's money supply adopts different policy trends such as "tight", "loose" or "moderate" according to the economic development in different periods.
Using various tools to adjust the money supply to adjust the market interest rate, the change of market interest rate will affect private capital investment and total demand to affect macroeconomic operation. The four tools of monetary policy to adjust aggregate demand are statutory reserve ratio, open market business and discount policy, and benchmark interest rate.
The nature of monetary policy (the way the central bank controls the money supply and the relationship between money, output and inflation) is one of the most attractive, important and controversial fields in macroeconomics.
(1) fiscal policy includes government expenditure and taxes. The main purpose of fiscal policy is to affect national savings, encourage work and savings, and thus affect long-term economic growth.
(2) Monetary policy is implemented by the central bank, which affects the money supply. By adjusting the money supply, the central bank affects the interest rate and credit supply in the economy, thus indirectly affecting the total demand, so as to achieve the ideal balance between total demand and total supply.
The object of monetary policy adjustment is the money supply, that is, the total purchasing power of the whole society, which is embodied in the cash in circulation and the deposits of individuals, enterprises and institutions in banks. Cash in circulation is closely related to the change of consumer price level, and it is the most active currency, which has always been an important goal for the central bank to pay attention to and adjust.
Monetary policy tools are various economic and administrative means controlled by the central bank to adjust the base money, bank reserves, money supply, interest rates, exchange rates and credit activities of financial institutions to achieve their policy objectives. There are seven main measures:
First, control currency issuance.
Second, control and standardize commercial bank loans.
Third, we should promote open market business.
Fourth, change the deposit reserve ratio.
Fifth, adjust the rediscount rate.
Sixth, selective credit control.
Seventh, direct credit control.