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MEANING
Monetary policy is an instrument which effect the credit flow in an economy.
The variation effect the demand & supply of credit in an economy, and the level or nature of economic activities.
Objective
Stability in price levelEconomic developmentArrangement of full employmentExpansion of credit facilityEquality & JusticeStability in exchange rate
INSTRUMENTS
GENERAL (QUANTITATIVE) Methods
SELECTIVE (QUALITATIVE) Methods
GENERAL (QUANTITATIVE) Methods
Meaning:-
These methods help in credit control in the economy.
Affect total quantity of the credit.
Types
A. Bank rate policy
B. Open market policy
C. Cash reserve ratio
D. Statuary reserve ratio
Bank Rate policy
Traditional approach:- Bank rate means on which central bank discounts and rediscount the eligible bills.
Today’s approach:- Bank rate means the minimum rate on which central bank provides financial accommodation to commercial bank in the discharge of its function as the lender of the last resort.
Effect of Bank rate
Increase in bank rate Increase in bank rate charge
by the central bank on its advance to commercial bank.
Commercial bank increase the rate of interest on their loan.
Demand for the credits and loan decrease.
Flow of the money decrease in the economy
Use in inflationary situation
Decrease in bank rate Decrease in bank rate charge
by the central bank on its advance to commercial bank.
Commercial bank decrease the rate of interest on their loan.
Demand for the credits and loan increase.
Flow of the money increase in the economy
Use in depression situation
Open Market operation
Its include the sales and purchase by the central bank of ….
AssetsForeign exchangeGoldGovernment securitiesCompany securities
Use of Open Market operation
In the inflationary situation Central bank decrease the
money supply. Central bank sale out the
securities to commercial bank and control money supply.
In the depressionary situation Central bank increase the
money supply. Central bank purchase the
securities from the commercial bank.
Cash Reserve Ratio
Commercial bank has to keep a certain percentage of his deposits with central bank.
It control the cash flow in economy.
It keeps changes in monetary policy framed by central bank of a country.
STATUARY LIQUIDITY RATIO
Commercial bank is to keep a certain percentage of his deposit as liquid asset.
It control the cash flow in economy.
It keeps changes in monetary policy framed by central bank of a country.
Use of C.R.R. & S.L.R
In Inflationary situationo Increased the percentage of
cash reserve ratio and Statutory liquidity ratio
o It reduces the supply of money in an economy
In Depressionary situationo Decreased the percentage
of cash reserve ratio and Statutory liquidity ratio
o It increases the supply of money in an economy
Function of credit regulation the quantitative methods
For expansion of credit Reduce the bank rate Purchase of securities Reduce the C.R.R. Reduce the S.L.R.
For contraction of credit Increase the bank rate sales of securities Increase the C.R.R. Increase the S.L.R.
Specific or qualitative Credit Control
Adopt for expansion and contraction of credit to attain specific objective.
Methods of qualitative credit control
• Credit rationing
• Change in margin
• Direct action
MEANING• Measures related to taxation & public
expenditure are normally called fiscal measures and the policy concerning them as known as FISCAL POLICY.
• In short, fiscal policy or budgetary policy consists of steps & measures which the government in order to fulfill the aims of economic policy.
Objective of fiscal policy
To achieve and maintain the full employment in the economy.
Attain Economic growth in long term.Achieve economic stability.To guide the allocation of existing resources
into socially necessary lines of development.
INSTRUMENTS
PUBLIC EXPENDITURE TAXATION PUBLIC DEBT
PUBLIC EXPENDITURE
Meaning:- Government spending Productive Non-Productive
Types
PUMP PRIMING The government spending
which will have the effect of setting the economy going on the way towards full utilization of resources.
Example:- Gov Expenditure, building infrastructure etc.
COMPENSATORY SPENDING The government spending
which will have the effect of setting the social objective and payment of interest on debt.
Example:- schools, hospitals, pensions, relief payments etc.
EFFECT
• Gov. exp should be reduced in inflation and increased during depressions in case of a deflationary situation in an economy. Therefore it act as a balancing factor between saving & investment
TAXATION
Meaning:-Source of RevenueHelps Gov. to do there exp.Generated from public
Types of Tax
Direct Tax• Direct tax are those tax
which a person pay to government directly for himself and can not enforce on other.
• For example:- income tax, wealth tax etc.
Indirect tax• Indirect tax are those tax
which a person can on others.
• For example:- service tax, sales tax.
Effect of Taxation
Reduction in taxation Increase the disposable
income. Increase the consumption
power. Use for offsetting the
deflation forces
Increase in Taxation Decrease the disposable
income. Decrease the consumption
power. Use for offsetting the
inflation forces.
Public Debt
When Gov. exp. are more then Gov. revenue Government take Public Debt.
Deficit financing = Gov. exp. – Gov. revenue.Government take the public debt to fulfill the
gap between the Gov exp and the revenue.
Types of public debt
Borrowing from publicBorrowing from commercial bankIssue of new currency
Effect
• Public Debt effect the inflation and deflation• If government take the borrowing from public
and banks it will decrease the cash flow in the market and increase the deflation.
• If there is depression in economy government repay the debt the public which increase the cash flow of the money in market.
Some facts and figures
Monetary policy is been framed by……………Fiscal policy is been framed by………………Present governor of R.B.I……………………Present Finance minister of India……………….Current S.L.R…………………….Current C.R.R…………………..Monetary policy in India framed under which
act……………………….