1.Discount rate Policy: Discount rate is the rate at which central bank lend money to commercial banks. If central bank decreases the discount rate, it means that commercial banks can easily borrow money from central bank and as a result supply of money increases in the market. which will result in increase in inflation and decrease in unemployment. If a central bank increases the discount rate , it means that central bank tighten the monetary policy and bank can find it hard to borrow money from central bank. As a result money supply decreases and inflation decrease also and unemployment increases.
2.Reserve Requirement Policy: Commercial banks have to put some cash and other liquid assets in the central bank as a reserve requirement which is called as CRR (Cash reserve requirement) and SLR( statutory liquidity reserves) . If central bank want to tighten the monetary policy to decrease inflation then central bank increases the reserve requirement rate so that bank has not so much money for lending to people. central bank can also lowers the reserve requirement to boost development projects, expenditures,more employment but it results in increase in inflation too.
3.Open Market operation : It is basically the buying and selling of government bonds by the central bank in open market. If the central bank buys the government bonds, it means central bank want to loosen the monetary policy by increasing the money supply in open market.If the central bank sells the government bonds, it means central bank want to tighten the monetary policy by decreasing the money supply in open market.
