Monetary policy involves controlling the supply of money to achieve goals like price stability and low unemployment. An expansionary policy increases the money supply, while a contractionary policy decreases it. Quantitative controls used by central banks include open market operations, adjusting reserve requirements, and changing interest rates. Qualitative controls target specific banks. In developing economies, monetary policy faces challenges from underdeveloped markets, non-monetized sectors, and lack of banking access. A monetary expansion shifts the LM curve down, raising output and lowering interest rates by increasing consumption and investment.

1. By,
Ansu Mariya T
MACFAST

2.  Monetary policy
1. The process by which the monetary authority
of a country controls the supply of money.
2. Targeting a rate of interest for the purpose of
promoting economic growth and stability.
3. Goals include relatively stable prices and low
unemployment.

3.  Expansionary & contractionary
An expansionary policy increases the total supply
of money in the economy more rapidly than usual.
Contractionary policy expands the money supply
more slowly than usual or even shrinks it.

4.  Neutrality of money
Any monetary change is the root cause of
all economic fluctuations. The monetary
authority should aim at neutrality of money
in the economy.
 Exchange stability
It is the traditional objective of monetary
authority. Monetary policy will correct the
disequilibrium in the balance of payments
and exchange stability will be maintained.

5.  Price stability
It is the genuine objective of monetary policy.
Cyclical fluctuations are totally eliminated by
monetary policy. It ensures equitable distribution of
income and wealth.
 Full employment
The main objective of monetary policy of a country
is to bring about equilibrium between saving and
investment at full employment level.
 Economic growth
It implies an increase in the total physical or real
output, production of the goods for the satisfaction of
human wants.

6. A. Quantitative controls
 1. Open-market operations
It comprises sales and purchases of government
securities and treasury bills by the central bank of
the country.
To increase the supply of money, it purchases the
securities.
To reduces the money circulation, it sells the
government bonds and securities.
 Most powerful and widely used tool.

7.  2.Discount rate or bank rate policy
It is the rate at which the central bank
rediscounts the bills of exchange presented
by the commercial banks.
For rediscounting the bills of exchange ,
the central bank charges a rate called bank
rate.
Simply , bank rate is the central bank
charges on the loans and advances to the
commercial banks.

8.  3.Cash Reserve Ratio (CRR)
IT is the percentage of total deposits
which commercial banks are required to
maintain in the form of cash reserve with the
central bank.
The objective of CRR is to prevent shortage
of cash in meeting the demand for cash by
the depositors.
Cash reserve is non- interest bearing
CRR is a legal requirement .So it is called
statutory reserve ratio (SRR).

9.  B. Qualitative or selective methods
 1.Changes in marginal requirements
Under this method, the central bank
effects a change in the marginal requirement
to control and release funds.
 2. Direct action
This method is adopted when some
commercial banks do not co-operate with the
central bank in controlling the credit.
 3. Rationing of the credit
The central bank fixes a limit for the
credit facilities to commercial banks.

10.  Supply of money:-
it refers to the currency issued by the
monetary authority and demand deposits
lying in the banks.
 Cost of money or rate of interest:-
The LDCs should adopt money policy to
promote agriculture and industrial sectors.
this discriminating policy of rate of interest is
favoured in priority sectors. In order to
reduce the aggregate demand, rate of
interest should be raised. This will result in
reduction of availability of money.

11. 1.Under-developed money market
Due to the unorganized nature of the money
market and lack of its integration with the
central bank, the traditional methods of
credit control have got limited effect.
2. Non-monetized sector
Due to the existence of an extensive non-
monetized sector, changes in the money
supply of the country or the change in the
interest rate do not have any effect on the
level of economic activity.

12. 3. Shortage of real factors
Another problem in developing countries
exists that there is a shortage of real factors
like capital, entrepreneurial ability, etc.
4. Lake of banking facilities
In a developing economy, adequate
banking facilities are not available. So the
idle savings of the people cannot be
mobilized.
5. Black money
In under developed countries, large
quality of black money due to political and
economic factors.

13. i
LM1 LM2 If the central bank engages in
a monetary expansion, the LM
curve shifts down. The IS stays
A still. The equilibrium moves
i1
from A to B indicating a higher
i2 B level of output and a lower
level of interest rate.
IS
Y1 Y2 Y
13

14. 1. Consumption(C):
Consumption increases since income
increases.
2. Investment(I):
A monetary expansion gives a twofold
boost to investment
3. Government(G):
Government expenditures are unchanged.
4. Taxes(T):
Taxes are unchanged.
14

15. Y
C
T 0
i
G 0
I