CHAPTER ONEINTRODUCTION1.1 BACKGROUND OF THE STUDYMonetary policy is the process by which monetary authority of a countrycontrols the supply of the money that is monetary stock often targeting a rate ofinterest for the purpose of promoting economic growth and stability.Monetary policy measures are monetary management put in place by thegovernment through the central bank. These measures rely on the control ofmonetary stocks, that is supply of money in order to influence board macroeconomicobjectives which includes price stability, high level of em*loymentsustainable economic growth and balance of payment equilibrium. These boardobjectives are achieved through the use of appropriate instrument depending onwhich objective the policy formulated want to achieved and also on the level ofdevelopment on the economy.11In the application of monetary policy measures as instrument ofstabilization, instrument of monetary policy are determined by the nature of theproblems to be solved and by this environment in which these problems exist.They are broadly two categories of these instruments VIZ- indirect and directinstruments. INDIRECT INSTRUMENT are usually used in the market based oneconomic where the quality of money stock can affected through the relationshipbetween supply and resume money as well as the ability of the monetary authorityto influence the creation of reserved.The reserved and hence money supply can be affected through the followingways.1. Deposit ratio/change in reserve.2. Change in discount rate.3. Interest rate change.4. Engaging in an open market operation.In an underdeveloped financial institution the instrument of monetarymanagement is largely limited to direct measure which set monetary and credittarget at desired levels. The major DIRECT control measure is direct investment12regulation however quantitative ceiling on overall credit operation is also used.These instruments of monetary policy are applied in the achievement of variedobjectives.
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