Answer to Question #47706 in Macroeconomics for Aditi

Question

a. Differentiate between monetary policy instruments and monetary policy tools
b.Describe the two key tools of monetary policy, and describe how they would be used by the Bank of Canada to implement a contractionary monetary policy.

Answer 1

The tools are techniques used like the central bank selling t-bills to increase money supply or a change in taxes, and the instruments to be the like the t-bills or changing taxes. One is the action, the other is the thing used in the action.
There are several monetary policy tools available to achieve these ends: increasing interest rates by fiat; reducing the monetary base; and increasing reserve requirements.
The primary tool of monetary policy is open market operations. This entails managing the quantity of money in circulation through the buying and selling of various financial instruments, such as treasury bills, company bonds, or foreign currencies. All of these purchases or sales result in more or less base currency entering or leaving market circulation.