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Monetary And Fiscal Policies
 

Monetary And Fiscal Policies

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    Monetary And Fiscal Policies Monetary And Fiscal Policies Presentation Transcript

    • MONETARY ANDMONETARY AND FISCAL POLICIESFISCAL POLICIES
    • InflationInflation InflationInflation is a rise in the generalis a rise in the general level of prices of goods andlevel of prices of goods and services in an economy over aservices in an economy over a period of time. When the priceperiod of time. When the price level rises, each unit of currencylevel rises, each unit of currency buys fewer goods and services.buys fewer goods and services. A chief measure of price inflationA chief measure of price inflation is the inflation rate.When Pricesis the inflation rate.When Prices rise the Value of Money falls.rise the Value of Money falls.
    • STAGES OF INFLATIONSTAGES OF INFLATION  1. CREEPING INFLATION (0%-3%)1. CREEPING INFLATION (0%-3%)  2. WALKING INFLATION ( 3% -2. WALKING INFLATION ( 3% - 7%)7%)  3. RUNNING INFLATION3. RUNNING INFLATION (10% - 20(10% - 20 %)%) 
    • TYPES OF INFLATIONTYPES OF INFLATION 1. Demand Pull Inflation1. Demand Pull Inflation 2. Cost Push Inflation2. Cost Push Inflation
    • Causes of InflationCauses of Inflation  1. Demand pull Inflation1. Demand pull Inflation Causes for Increase in Demand :-Causes for Increase in Demand :- a)a)Increase in Money SupplyIncrease in Money Supply b)b)Increase in Black MarketingIncrease in Black Marketing c)c) Increase in HoardingIncrease in Hoarding d)d)Repayment of Past Internal DebtRepayment of Past Internal Debt e)e)Increase in ExportsIncrease in Exports f)f) Deficit FinancingDeficit Financing
    • Cont……….Cont………. g) Increase in Incomeg) Increase in Income h) Demonstration Effecth) Demonstration Effect i) Increase in Black moneyi) Increase in Black money j) Increase in Credit facilitiesj) Increase in Credit facilities
    • Cont….Cont….  2) Cost Push Inflation2) Cost Push Inflation Causes for Increase in Cost :-Causes for Increase in Cost :- a)a)Increase in cost of raw materialsIncrease in cost of raw materials b)b)Shortage of SuppliesShortage of Supplies c)c)Natural calamitiesNatural calamities d)d)Industrial DisputesIndustrial Disputes e)e)Increase in ExportsIncrease in Exports f)f) Increase in WagesIncrease in Wages g)g)Increase in Transportation CostIncrease in Transportation Cost h)h)Huge Expenditure on AdvertisementHuge Expenditure on Advertisement
    • Effects of InflationEffects of Inflation  Inflation can have positive and negativeInflation can have positive and negative effects on an economy. Negative effects ofeffects on an economy. Negative effects of inflation include loss in stability in the realinflation include loss in stability in the real value of money and other monetary itemsvalue of money and other monetary items over time; uncertainty about future inflationover time; uncertainty about future inflation may discourage investment and saving, andmay discourage investment and saving, and high inflation may lead to shortages ofhigh inflation may lead to shortages of goods if consumers begin hoarding out ofgoods if consumers begin hoarding out of concern that prices will increase in theconcern that prices will increase in the future. Positive effects include a mitigationfuture. Positive effects include a mitigation of economic recessions, and debt relief byof economic recessions, and debt relief by reducing the real level of debt.reducing the real level of debt.
    • Cont…..Cont….. 1.1. Effect on ProducersEffect on Producers 2.2. Effect on DebtorsEffect on Debtors 3.3. Effect on CreditorsEffect on Creditors 4.4. Effect on Fixed Income GroupEffect on Fixed Income Group 5.5. Effect on Wage EarnersEffect on Wage Earners 6.6. Effect on Equity HoldersEffect on Equity Holders 7.7. Effect on farmersEffect on farmers 8.8. Effect on ProdutionEffect on Prodution
    • 9.Effect on Hoarding9.Effect on Hoarding 10.Effect on value of Money10.Effect on value of Money 11.Effect on Investment11.Effect on Investment 12. Effect on savings12. Effect on savings
    • What is the MonetaryWhat is the Monetary Policy?Policy? The Monetary and Credit Policy is the policyThe Monetary and Credit Policy is the policy statement, traditionally announced twice astatement, traditionally announced twice a year, through which the Reserve Bank ofyear, through which the Reserve Bank of India seeks to ensure price stability for theIndia seeks to ensure price stability for the economy.economy. These factors include - money supply,These factors include - money supply, interest rates and the inflation. In banking andinterest rates and the inflation. In banking and economic terms money supply is referred toeconomic terms money supply is referred to as M3 - which indicates the level (stock) ofas M3 - which indicates the level (stock) of legal currency in the economy.legal currency in the economy. Besides, the RBI also announces norms forBesides, the RBI also announces norms for the banking and financial sector and thethe banking and financial sector and the institutions which are governed by it.institutions which are governed by it.
    • How is the Monetary PolicyHow is the Monetary Policy different from the Fiscaldifferent from the Fiscal Policy?Policy?  The Monetary Policy regulates the supply of money and theThe Monetary Policy regulates the supply of money and the cost and availability of credit in the economy. It deals withcost and availability of credit in the economy. It deals with both the lending and borrowing rates of interest forboth the lending and borrowing rates of interest for commercial banks.commercial banks.  The Monetary Policy aims to maintain price stability, fullThe Monetary Policy aims to maintain price stability, full employment and economic growth.employment and economic growth.  The Monetary Policy is different from Fiscal Policy as theThe Monetary Policy is different from Fiscal Policy as the former brings about a change in the economy by changingformer brings about a change in the economy by changing money supply and interest rate, whereas fiscal policy is amoney supply and interest rate, whereas fiscal policy is a broader tool with the government.broader tool with the government.  The Fiscal Policy can be used to overcome recession andThe Fiscal Policy can be used to overcome recession and control inflation. It may be defined as a deliberate change incontrol inflation. It may be defined as a deliberate change in government revenue and expenditure to influence the levelgovernment revenue and expenditure to influence the level of national output and prices.of national output and prices.
    • What are the objectives ofWhat are the objectives of the Monetary Policy?the Monetary Policy?  The objectives are to maintain price stabilityThe objectives are to maintain price stability and ensure adequate flow of credit to theand ensure adequate flow of credit to the productive sectors of the economy.productive sectors of the economy. Stability for the national currency (afterStability for the national currency (after looking at prevailing economic conditions),looking at prevailing economic conditions), growth in employment and income are alsogrowth in employment and income are also looked into. The monetary policy affects thelooked into. The monetary policy affects the real sector through long and variablereal sector through long and variable periods while the financial markets are alsoperiods while the financial markets are also impacted through short-term implications.impacted through short-term implications.
    • INSTRUMENTS OFINSTRUMENTS OF MONETARY POLICYMONETARY POLICY  1. Bank Rate of Interest1. Bank Rate of Interest  2. Cash Reserve Ratio2. Cash Reserve Ratio  3. Statutory Liquidity Ratio3. Statutory Liquidity Ratio  4. Open market Operations4. Open market Operations  5. Margin Requirements5. Margin Requirements  6. Deficit Financing6. Deficit Financing  7. Issue of New Currency7. Issue of New Currency  8. Credit Control8. Credit Control
    • Bank Rate of InterestBank Rate of Interest It is the interest rate which is fixed by the RBI to control theIt is the interest rate which is fixed by the RBI to control the lending capacity of Commercial banks . During Inflation ,lending capacity of Commercial banks . During Inflation , RBI increases the bank rate of interest due to whichRBI increases the bank rate of interest due to which borrowing power of commercial banks reduces whichborrowing power of commercial banks reduces which thereby reduces the supply of money or credit in thethereby reduces the supply of money or credit in the economy .When Money supply Reduces it reduces theeconomy .When Money supply Reduces it reduces the purchasing power and thereby curtailing Consumption andpurchasing power and thereby curtailing Consumption and lowering Prices.lowering Prices.
    • Cash Reserve RatioCash Reserve Ratio CRR, or cash reserve ratio, refers to a portion ofCRR, or cash reserve ratio, refers to a portion of deposits (as cash) which banks have to keep/maintaindeposits (as cash) which banks have to keep/maintain with the RBI. During Inflation RBI increases the CRRwith the RBI. During Inflation RBI increases the CRR due to which commercial banks have to keep a greaterdue to which commercial banks have to keep a greater portion of their deposits with the RBI . This serves twoportion of their deposits with the RBI . This serves two purposes. It ensures that a portion of bank deposits ispurposes. It ensures that a portion of bank deposits is totally risk-free and secondly it enables that RBI controltotally risk-free and secondly it enables that RBI control liquidity in the system, and thereby, inflation.liquidity in the system, and thereby, inflation.
    • Statutory LiquidityStatutory Liquidity RatioRatio Banks are required to invest a portion ofBanks are required to invest a portion of their deposits in government securitiestheir deposits in government securities as a part of their statutory liquidity ratioas a part of their statutory liquidity ratio (SLR) requirements . If SLR increases(SLR) requirements . If SLR increases the lending capacity of commercial banksthe lending capacity of commercial banks decreases thereby regulating the supplydecreases thereby regulating the supply of money in the economy.of money in the economy.
    • Open marketOpen market OperationsOperations It refers to the buying and selling ofIt refers to the buying and selling of Govt. securities in the open market .Govt. securities in the open market . During inflation RBI sells securities in theDuring inflation RBI sells securities in the open market which leads to transfer ofopen market which leads to transfer of money to RBI.Thus money supply ismoney to RBI.Thus money supply is controlled in the economy.controlled in the economy.
    • Margin RequirementsMargin Requirements  During Inflation RBI fixes a high rate ofDuring Inflation RBI fixes a high rate of margin on the securities kept by themargin on the securities kept by the public for loans .If the margin increasespublic for loans .If the margin increases the commercial banks will give lessthe commercial banks will give less amount of credit on the securities kept byamount of credit on the securities kept by the public thereby controlling inflation.the public thereby controlling inflation.
    • Deficit FinancingDeficit Financing  It means printing of new currency notesIt means printing of new currency notes by Reserve Bank of India .If more newby Reserve Bank of India .If more new notes are printed it will increase thenotes are printed it will increase the supply of money thereby increasingsupply of money thereby increasing demand and prices.demand and prices.  Thus during Inflation, RBI will stopThus during Inflation, RBI will stop printing new currency notes therebyprinting new currency notes thereby controlling inflation.controlling inflation.
    • Issue of New CurrencyIssue of New Currency  During Inflation the RBI will issue newDuring Inflation the RBI will issue new currency notes replacing many oldcurrency notes replacing many old notes.notes. This will reduce the supply of money inThis will reduce the supply of money in the economy.the economy.
    • Fiscal PolicyFiscal Policy  It refers to the Revenue and ExpenditureIt refers to the Revenue and Expenditure policy of the Govt. which is generallypolicy of the Govt. which is generally used to cure recession and maintainused to cure recession and maintain economic stability in the country.economic stability in the country.
    • Instruments of FiscalInstruments of Fiscal PolicyPolicy  1. Reduction of Govt. Expenditure1. Reduction of Govt. Expenditure  2. Increase in Taxation2. Increase in Taxation  3. Imposition of new Taxes3. Imposition of new Taxes  4. Wage Control4. Wage Control  5.Rationing5.Rationing  6. Public Debt6. Public Debt  7. Increase in savings7. Increase in savings  8. Maintaining Surplus Budget8. Maintaining Surplus Budget
    • Other MeasuresOther Measures  1. Increase in Imports of Raw materials1. Increase in Imports of Raw materials  2. Decrease in Exports2. Decrease in Exports  3. Increase in Productivity3. Increase in Productivity  4. Provision of Subsidies4. Provision of Subsidies  5. Use of Latest Technology5. Use of Latest Technology  6. Rational Industrial Policy6. Rational Industrial Policy