Question1: Explain critically what monetary tools are used by central banks, such as the Bank of England, the European Central Bank and the US Federal Reserve to control the money supply. Explain why central banks cannot fully control the money supply. Central Bank was given to their formulation and implementation of monetary policy by government; it is special financial institutions to manage macro-economic control and management of the national economy. From the operational objectives, Central Banks are not for profit-making purposes. It responsible to regulate financial in orders to stabilize the currency and promoting economic development. Do so in the operational activities of the Central Bank also made a profit, but profit is not a goal. From the service object, Central Bank only movement fund between commercial banks and other financial institutions. And through the business relationship with such institutions, carrying out and implementing the Government's economic policies, and fulfill their duty of managing the financial. From the operational content, Central Bank exclusives the right of issue currency. Through the development and implementation of monetary policy and controlling the money supply so that currency aggregate supply and aggregate demand tend to balance. The Central Bank most belongs to the authority of State and Government. For example, United States Federal Reserve system is directly responsible to Congress; it is a Department of the National Assembly. (The role of central banks, 2007) This shows Central Bank is the country's Supreme management institution of the finance industry; Central Bank represents State to develop and implement a unified monetary policy, monitoring of national financial institution's business activities; Central Bank represents the State to participate in international financial organizations and international financial activities. Monetary policy tool is a mean of regulation to achieve the goal of economic macro-control. Because of balance of aggregate supply and aggregate demand in the community and the total amount of the money supply and money demand balance of the total complement each other. So as to realize such as stable currencies, increasing employment, balance of payments, develop economic, etc. Monetary policy is related to global macro-economic policies, and close ties fiscal policy. Comprehensive measures must be implemented in order to maintain currency stability. After the Central Bank's monetary policy objectives have been identified, you also need a set of effective monetary policy tools to ensure the implementation of monetary policy objectives. Tools of monetary policy is directly controlled by the Central Bank, it have a direct or indirect effects on money supply, interest rates, and financial institution credit activities, and it in favors of the Central Bank's monetary policy objectives are met. The Central Bank's monetary policy tool, there are three main ways: 1. Changing the reserve requirement;
2. Changing the discount rate;
3. Open market operations. (The tool of monetary policy of central bank, 2007) Changing the reserve requirement:
Reserve requirement refers to the Central Bank by adjusting reserve ratio of commercial banks to change the money multiplier, ability to control the financial institutions credit expansion and indirectly control the society money supply. Thus affects national economic activity. Reserves concentrated in the Central Bank, initially began in the United Kingdom. But in the form of law requires commercial banks must be deposited with the Central Bank reserve, this requirement began implement in 1913 United States Federal Reserve Act. At begin, reserves no scalability. In 1935, Fed first time got rights to change the statutory deposit reserve ratio, deposited reserve system really become an important tool of the Central Bank's monetary policy. So far, all country which has central banking system, represent they...
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