Monetary Policy

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Monetary policy objectives and instruments

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Monetary Policy

  1. 1. Monetary Policy Som N. Sigdel MBA (Saga)
  2. 2. What is Monetary Policy? <ul><li>Monetary Authority’s policy to manage supply of money to achieve predetermined macroeconomic goals primarily Price Stability </li></ul><ul><li>Policy affecting quantity of money which determines cost and availability of credit. </li></ul>
  3. 3. Types of Monetary Policy <ul><li>Expansionary </li></ul><ul><li>Contractionary </li></ul>
  4. 4. Goals/Objectives <ul><li>Theoretically……….. </li></ul><ul><li>Monetary Policy aims to achieve </li></ul>
  5. 5. Higher Economic Growth <ul><li>Top priority in the economic agenda </li></ul><ul><li>Level of economic growth determines fulfillment of social and economic need of people </li></ul><ul><li>Only way to create job and eradicate poverty </li></ul>
  6. 6. Higher Rate of Employment <ul><li>Congruent with economic growth objective </li></ul><ul><li>Go “Hand-in-Hand” </li></ul><ul><li>High employment is desired: Unemployment leads to lost output </li></ul><ul><li>Full employment: All resources available in country are mobilized, National Income is maximum </li></ul>
  7. 7. Price Stability <ul><li>Inflation increases price deflation decreases </li></ul><ul><li>Inflation: Fixed income group face economic problem. Problem in every sector of economy </li></ul><ul><li>Deflation: Flexible income earners face problem. May paralyze the economy </li></ul><ul><li>Remain free from inflation and deflation! Control money supply. </li></ul><ul><li>Does not mean stable price. Reasonable limit. </li></ul>
  8. 8. Neutrality of Money <ul><li>Quantity of money increase: Inflation </li></ul><ul><li>Quantity of money decrease: Deflation </li></ul><ul><li>Inflation/Deflation: Disequilibrium </li></ul><ul><li>Control quantity of money: So that no change in </li></ul><ul><ul><li>Aggregate production </li></ul></ul><ul><ul><li>Aggregate buying and selling </li></ul></ul><ul><ul><li>General price level </li></ul></ul>
  9. 9. Stability <ul><li>Exchange Rate </li></ul><ul><li>Financial Market </li></ul><ul><li>Interest Rate </li></ul>
  10. 10. Instruments of Monetary Policy <ul><li>Quantitative Instruments </li></ul><ul><li>Qualitative Instruments </li></ul>
  11. 11. Quantitative Instruments <ul><li>Bank Rate/ Discount Rate </li></ul><ul><li>Open Market Operations(OMOs) </li></ul><ul><li>Cash reserve Ratio </li></ul>
  12. 12. Qualitative Instruments <ul><li>Credit Ceiling </li></ul><ul><li>Change in Margin Lending </li></ul><ul><li>Directed Credit Control </li></ul><ul><li>Moral Suasion </li></ul>
  13. 13. <ul><li>Importance </li></ul><ul><li>in </li></ul><ul><li>Developing </li></ul><ul><li>Countries </li></ul>
  14. 14. Development of Financial Institutions <ul><li>Underdeveloped country: Lack of “Financial Institutions” </li></ul><ul><li>People do not use Bank : All income goes to consumption </li></ul><ul><li>No encouragement in Saving </li></ul><ul><li>No Saving: No Investment </li></ul><ul><li>Obstruction in economic growth </li></ul>
  15. 15. Monetization of Rural Sector <ul><li>Underdeveloped countries: More people live to rural areas </li></ul><ul><li>Transaction in barter system </li></ul><ul><li>Monetary policy helps to remove barter system </li></ul><ul><li>eg: Kale Damai </li></ul>
  16. 16. Development of Organized Money Market <ul><li>Lack of organized money market: Money market controlled by big and rich money lenders </li></ul><ul><li>Exploit general class </li></ul><ul><li>Central Bank: Unorganized money market into organized. Appropriate interest rate. </li></ul>
  17. 17. Increase in Investment <ul><li>Low income: High MPC, no saving </li></ul><ul><li>No Saving : No Investment </li></ul><ul><li>Monetary Policy: Proper environment for saving, Capital formation </li></ul><ul><ul><li>Increasing interest rate (encourage saving) </li></ul></ul><ul><ul><li>Loan at appropriate interest rate (encourage investment) </li></ul></ul>
  18. 18. Appropriate BOP <ul><li>Export <Import </li></ul><ul><li>Export raw material, Import finished goods </li></ul><ul><li>Monetary Policy: Encourages production of export goods providing subsidies </li></ul>
  19. 19. <ul><li>Any Queries? </li></ul>
  20. 20. <ul><li>Thank You </li></ul>

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