Understand how central banks like the Federal Reserve and ECB control money supply, interest rates, and liquidity to manage inflation, growth, and currency stability.
Monetary policy is the process by which a country's central bank (like the Federal Reserve in the U.S. or State Bank of Pakistan) controls money supply, interest rates, and liquidity to:
| Country | Central Bank |
|---|---|
| 🇺🇸 USA | Federal Reserve (Fed) |
| 🇪🇺 Eurozone | European Central Bank (ECB) |
| 🇬🇧 UK | Bank of England (BoE) |
| 🇵🇰 Pakistan | State Bank of Pakistan (SBP) |
| 🇯🇵 Japan | Bank of Japan (BoJ) |
Used during: Recession or slow growth
Goal: Stimulate economy
Used when: Inflation is too high
Goal: Slow down the economy to cool prices
| Tool | What It Does |
|---|---|
| Interest Rate | Raising or lowering the policy rate affects loans, mortgages, and investment |
| Open Market Operations | Buying/selling government securities to control liquidity |
| Reserve Requirement | % of deposits banks must hold — higher = less lending |
| Discount Rate | Rate at which banks borrow from the central bank |
| Forward Guidance | Signals from central bank about future policy direction |
| Scenario | Policy Used | Outcome |
|---|---|---|
| 2008 Financial Crisis | Expansionary | Fed cut rates to 0%, QE to stimulate economy |
| 2022-2023 Inflation | Contractionary | Central banks raised rates to fight inflation |
| COVID-19 Lockdowns | Massive stimulus | Global central banks cut rates & printed money |
| Goal | Action |
|---|---|
| Boost Growth | Lower Rates, Print Money |
| Fight Inflation | Raise Rates, Reduce Money |
