Distinguish between monetary policy instruments and monetary policy tools. Describe any two key ...

Monetary policy instruments and monetary policy tools can be differentiated on the basis of their form and usage. Monetary policy instruments include methods and instruments used for the purpose of controlling and regulating the monetary and economic condition of a nation. Moreover they are also useful for the purpose of ensuring that there is sufficient money in the economy.

On the other hand in case of a monetary authority wanting to stimulate an economy in a recession, it tries to attempt an increase in the supply of money in the economy. For this it needs to decrease the prices of the loans in the form of interest rates in order to encourage people to take loans. Yet, the situation is such in times of a recession that even an extremely low rate of interest on loans cannot stimulate the demand for loans immediately and it takes time for it to be able to come back to the normal situation.

 In this way demand for loans keeps declining due o the economic conditions even in case of the monetary authority decreasing the interest rates significantly. Also, in case of stimulating the economy the monetary authority adopts monetary policies and fiscal policies that can help them form a suitable measure to increase the supply of money in the economy, which can be used by the Canadian bank as a contradictory policy.