Money Supply In Malaysia Are Interest Rate

Ru8nning head: Money Supply
Money Supply
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Money Supply1
Table of Contents
Answer 1..........................................................................................................................................2
Answer 2..........................................................................................................................................3
Answer 3..........................................................................................................................................4
Reference.........................................................................................................................................6

Money Supply2
Answer 1
(a) Apart from the statutory requirement ratio, the tools that the central bank use to regulate
money supply in Malaysia are interest rate, overnight policy rate and open market operation. The
rate at which the central bank lends money to the commercial banks is known as the interest rate.
Thus, if the central bank increases interest rate then the economy’s money supply will fall as
commercial banks will borrow less from the central bank (Oluseyi 2017). The opposite will
occur if the interest rises. Overnight policy rate is the interest changed by the central bank when
commercial banks lend money from the central bank during emergency period. The effect of
OPR is similar to the interest rate. Open market operation is used by the central bank to buy back
or sell the bonds. Money supply increases when the central banks and decreases buy back bonds
in the opposite case.
(b) Lowering the statutory reserve requirement will allow the commercial banks to keep less
amount of money in reserves. It means that the lending capacity of central banks will rise
resulting in increase in money supply (Glocker and Towbin 2015). On the other hand, as the
commercial banks have more money in hand for the purpose of lending the bans would charge
lower interest rate on loans. Therefore, lowering statutory reserve requirement causes interest
rate to fall.
(c) The money supply of an economy will rise due to low statutory reserve requirement.
Consequently, the disposable income of people will rise. With more money in hand the people
will consume more which will cause to increase the aggregate demand of the economy (Carvalho
and Rezai 2015). Hence, with increased amount of demand the supplier would supply more