Instruments and working of monetary policy

Monetary policy steers the economy by changing the price and quantity of money. Its instruments divide into quantitative (affecting overall liquidity) and qualitative (directing credit to particular uses). The main quantitative tools are the policy rate, open market operations, reserve ratios and the standing facilities. Worked example: if the central bank sells government securities worth 100 in an open market sale, bank reserves fall by 100; with a 10% reserve ratio and no leakages, broad money can contract by up to 10 x 100 = 1000 through the reverse multiplier.