2. Monetary policy is the actions of a central bank,
currency board or other regulatory committee that
determine the size and rate of growth of the money
supply, which in turn affects interest rates.
Monetary policy is maintained through actions such as
modifying the interest rate, buying or selling
government bonds, and changing the amount of money
banks are required to keep in the vault (bank reserves).
Central bank is called monetary authority in the country
and RBI is monetary Authority of India.
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Monetary Policy
3. According to Prof. Harry Johnson,
"A policy employing the central banks control of the supply
of money as an instrument for achieving the objectives of
general economic policy is a monetary policy."
According to A.G. Hart,
"A policy which influences the public stock of money
substitute of public demand for such assets of both that is
policy which influences public liquidity position is known as
a monetary policy.“
According to Reserve Bank of India
“ Monetary policy refers to the use of instruments under the
control of the central bank to regulate the availability, cost
and use of money and credit.”
Definition
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4. Contractionary and expansionary
1. Interest rates
2. Reserve requirements
3. Money supply, directly or indirectly
Types of monetary policy
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5. Secondary objective:
Balance of Payments (BOP) Equilibrium
Full Employment
Neutrality of Money
Equal Income Distribution
Objective
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Primary objective:
Ensuring price stability, that is, containing inflation.
To encourage economic growth.
To ensure stability of exchange rate of the rupee, that is,
exchange rate of rupee with the US dollar, pound sterling
and other foreign currencies.
6. Bank Rate policy(BRP)
OMO
Reserve Requirement(CRR and SLR)
REPO
REVERSE REPO
Instrument/ Tools of monetory policy
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Quantitative Instruments or General Tools
7. Fixing Margin Requirements
Consumer Credit Regulation
Publicity
Credit Rationing
Moral Suasion
Control through Directives
Direct Action
Qualitative Instruments or Selective Tools
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8. To Control Inflationary Pressures
To Achieve Price Stability
To Bridge BOP Deficit
To Create habit of Banking and Financial Institutions
Debt Management
Reforming Rural Credit System
Long-Term Loans for Industrial Development
Monetization of Economy
Role of monetary Policy in the Economy:
Generally developing and underdeveloped economy
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10. Fiscal policy is the means by which a government adjusts
its spending levels and tax rates to monitor and influence a
nation's economy
It is the decisions that a government makes regarding
collection of revenue, through taxation and about spending
that revenue.
“Fiscal policy deals with the taxation and expenditure
decisions of the government. These include, tax policy,
expenditure policy, investment or disinvestment strategies
and debt or surplus management.”- Kaushik Basu
Fiscal policy:
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11. Neutral fiscal policy
it is usually undertaken when an economy is in
equilibrium. Government spending is fully funded by tax revenue and
overall the budget outcome has a neutral effect on the level
of economic activity.
Expansionary fiscal policy
it involves government spending exceeding tax revenue, and is usually
undertaken during recessions. It is also known as reflationary fiscal
policy.
Contractionary fiscal policy
it occurs when government spending is lower than tax revenue, and is
usually undertaken to pay down government debt.
Types of fiscal policy
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12. Public expenditure
Taxation
Public Debt
Transfer payment
Instrument of fiscal policy
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13. Fiscal Policy for Full Employment
Fiscal Policy and Economic Stabilization
Fiscal Policy and Economic Growth
Fiscal Policy and Social Justice
Objective of fiscal policy
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14. Time lag
а. Recognition Lag
b. Administrative Lag
c. operational Lag
Forecasting
Coordination with Monetary Policy(fiscal sensitivity)
Political Conflict
Crowding Out(self-offsetting Effect)
Correct Size and Nature of Fiscal Policy
Inadequacy of Fiscal Measures
Adverse Effect on Redistribution of Income
Administrative Problems in Democratic Countries
Limitation of fiscal policy
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18. Types of inflation:
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On the basis of cause:
1. Demand pull inflation.
2. Cost push inflation
3.Credt inflation
4.Deficit induce inflation
5. Currency inflation
On the basis of government reaction:
1. Open inflation
2 Suppressed inflation
20. Causes of inflation
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Increase in demand
Increase in money supply
Increase in public expenditure
Consumer spending
Population size
Soft monetary policy
Deficit financing
Expansion of private sector
Black money
Increase in export
Repayment of public debt
21. Contd:
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Factor affecting supply
Shortage of FOP
Industrial dispute
Natural calamities
Lop-sided production
International factors
22. High degree of inflation has adverse effects on the economy
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First, inflation raises the cost of living of the people and hurts
the poor most. Therefore, inflation has been described as enemy
No. 1 of the poor. Inflation sends many people below the poverty
line.
Secondly, inflation makes exports costlier and, therefore,
discourages them. On the other hand, due to higher prices at
home people are induced to import goods to a large extent. Thus,
inflation has an adverse effect on the balance of payments.
Thirdly, when due to a higher rate of inflation value of money is
rapidly falling, people do not have much incentive to save. This
lowers the rate of saving on which investment and economic
growth depend.
Fourthly, a high rate of inflation encourages businessmen to
invest in the unproductive assets such as gold, jewellery, real
estate etc.
23. Control/ Measure of inflation
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Monetary measure
Credit control
Demonetization of currency
Issue of new currency
Fiscal measure
Reduction of unnecessary expenditure
Increase taxation
Encourage to save
Appropriate budget
Management of public debt.
Others
Increase production
Rational wage policy
Price control or fixing price
Management of resource
24. Why little inflation is better?
A little inflation (around 3-5%) is always considered as good
for overall growth of economy.
The consumer always expects the prices of goods to increase,
so they spend more frequently, which increases demand and
provide profitability to the manufacturers.
A little inflation is a sign of growing and healthy economy.
Inflation always works as a lubricant for any shock to
economy and help it to recover. For example in a recession
time cutting wages are considered more profitable than
cutting jobs, but the earlier is not accepted easier than the
later, and as we know job cuts are always bad for economy. But
if there’s inflation in economy, employers just need to provide
lesser raise than inflation rate and no one would mind.
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