MONETARY
POLICY
INTRODUCTION
 BARTER SYSTEM
 DIFFUCLITIES
Double coincidence of wants

Measure of value
DEFINITION OF MONEY
DEF: anything that is generally acceptable as
a means of exchange and that at the same time

acts as ...
FUNCTIONS OF MONEY
Medium of exchange
Measure of value
Store of value
Standard of differed payments
IMPORTANCE OF MONEY
Fundamental discovery
Capitalist economy
Socialist economy
planning
MONEY SUPPLY
 M1= currency with the public +DD (narrow money)
 M2=M1+post office deposits
 M3=M1+time deposits with the...
RESERVE MONEY
 Reserve money: government money, RR is the cash held by the
pubic and the banks
 It is composed of
 C+OD...
FIAT MONEY
 CURRENCY NOTES IN CIRCULATION ARE NORMALLY
REFERRED TO AS FIAT MONEY

 THE NOTES ISSUED BY THE RBI ARE USUAL...
MONETARY POLICY
 BASIC GOALS : full employment ,price stablity,rapid
economic growth ,balance of payments equilibrium and...
INSTRUMENTS OF
MONETARY POLICY
QUANTITATIVE CREDIT CONTROL
MEASURES

SELECTIVE CREDIT CONTROL
MEASURES
QUANTITATIVE CREDIT
CONTROL


Bank rate

 Variation of cash reserve ratios
 Open market operations
1.the possession by ...
SELECTIVE CRDIT
CONTROL
 Fixing minimum margin of lending
 Ceiling on the amount of credit for expansion
 Different rat...
MONETARY
TRANSMISSION
The transmission mechanism tells that
monetary policy affects income through

the interest rate and...
DDDDDDD
ARGUMENTS
Interest rate is inversely related with
consumption

Income may change by altering net private
wealth
Liquidi...
DEAR MONEY
When there is inflation in a
country ,the central bank tries to
control it by dear
money……….interest rates are...
CHEAP MONEY
CHEAP MONEY loans are available at low
rates of interest rate it is fallowed during

?
VALUE OF MONEY
 PURCHASING POWER OF MONEY
 PRICE LEVEL

A general rise in the price level indicates a fall in the value ...
THE QUANTITY THEORY
OF MONEY OR THE
EQUATION OF EXCHANGE
 Irving Fisher
 “prices always change in exact proportion to ch...
EQUATION OF EXCHANGE
 MV=PT(P=MV/T)
 M=amount of money
 V=velocity of circulation of money

 P=price level
 T=volume ...
 Now a days, a large proprtion of money consists of ?
So the equation of exchange has been modified as
 PT=MV+M‟V‟
 M‟=...
INFLATION
 Inflation is a state in which the value of money i.e price are
rising –crowther
 There is inflation even with...
TYPES OF INFLATION
 Demand pull inflation
 Creeping or persistent inflation -1945-prices and wages push each other
 Run...
MEASURES TO CHECK
INFLATION
 Incresed taxation
 Reducing government exp. ?
 Restriction on imports

 Rationong
 Price...
DEFLATION
 Crowther- state in which the value of money is
rising i.e prices are falling
 Bad trade and unemployment

 L...
EFFECTS OF CHANGES IN
PRICES
inflation
production

stimulate

deflation
Discourage

Distribution
Business class
Fixed inco...
Inflation is unjust and deflation is inexpedient

Any questions

?
THANK YOU

HAVE A NICE AND FRUITFULL HOLIDAYS
 YOURS
S.MADAN KUMAR
M.A.,M.A.,B.Ed.,M.Phil.,M.B.A
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Monetary policy

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Monetary policy

  1. 1. MONETARY POLICY
  2. 2. INTRODUCTION  BARTER SYSTEM  DIFFUCLITIES Double coincidence of wants Measure of value
  3. 3. DEFINITION OF MONEY DEF: anything that is generally acceptable as a means of exchange and that at the same time acts as a measure and as a store of valueCrowther Money is that which money does-Walker
  4. 4. FUNCTIONS OF MONEY Medium of exchange Measure of value Store of value Standard of differed payments
  5. 5. IMPORTANCE OF MONEY Fundamental discovery Capitalist economy Socialist economy planning
  6. 6. MONEY SUPPLY  M1= currency with the public +DD (narrow money)  M2=M1+post office deposits  M3=M1+time deposits with the banks (broad money)  M4 =M3+total post office deposits
  7. 7. RESERVE MONEY  Reserve money: government money, RR is the cash held by the pubic and the banks  It is composed of  C+OD+CR C=currency with the public in circulation OD=other deposits of public with the RBI CR=cash reserve of banks M=RM
  8. 8. FIAT MONEY  CURRENCY NOTES IN CIRCULATION ARE NORMALLY REFERRED TO AS FIAT MONEY  THE NOTES ISSUED BY THE RBI ARE USUALLY REFERED AS BANK MONEY OR PROMISSORY NOTES
  9. 9. MONETARY POLICY  BASIC GOALS : full employment ,price stablity,rapid economic growth ,balance of payments equilibrium and economic justice.  “monetary policy is policy that employs the central bank „s control over the supply and cost of money as an instruments for achieving the objectives of economic policy”
  10. 10. INSTRUMENTS OF MONETARY POLICY QUANTITATIVE CREDIT CONTROL MEASURES SELECTIVE CREDIT CONTROL MEASURES
  11. 11. QUANTITATIVE CREDIT CONTROL  Bank rate  Variation of cash reserve ratios  Open market operations 1.the possession by the central bank of adequate volume of securities 2.The presence of well developed bill market 3.Stability of CRR
  12. 12. SELECTIVE CRDIT CONTROL  Fixing minimum margin of lending  Ceiling on the amount of credit for expansion  Different rate of interest will be charged to encourage certain sectors  The central bank will persuade the commercial banks to follow certain policies through moral suasion
  13. 13. MONETARY TRANSMISSION The transmission mechanism tells that monetary policy affects income through the interest rate and investment
  14. 14. DDDDDDD
  15. 15. ARGUMENTS Interest rate is inversely related with consumption Income may change by altering net private wealth Liquidity trap
  16. 16. DEAR MONEY When there is inflation in a country ,the central bank tries to control it by dear money……….interest rates are high
  17. 17. CHEAP MONEY CHEAP MONEY loans are available at low rates of interest rate it is fallowed during ?
  18. 18. VALUE OF MONEY  PURCHASING POWER OF MONEY  PRICE LEVEL A general rise in the price level indicates a fall in the value of money A general fall in prices indicates ?
  19. 19. THE QUANTITY THEORY OF MONEY OR THE EQUATION OF EXCHANGE  Irving Fisher  “prices always change in exact proportion to change in the quantity money .if the amount of money doubled ,prices double.if the amount of money is halved,prices fall to half their original level”
  20. 20. EQUATION OF EXCHANGE  MV=PT(P=MV/T)  M=amount of money  V=velocity of circulation of money  P=price level  T=volume of trade
  21. 21.  Now a days, a large proprtion of money consists of ? So the equation of exchange has been modified as  PT=MV+M‟V‟  M‟= ?  V‟=?
  22. 22. INFLATION  Inflation is a state in which the value of money i.e price are rising –crowther  There is inflation even without rise in the price level this is known as Repressed inflation  A situation marked by rising prices and stagnation in demand is known as Stagflation
  23. 23. TYPES OF INFLATION  Demand pull inflation  Creeping or persistent inflation -1945-prices and wages push each other  Runway or galloping or hyper inflation  Cost push inflation  Bottleneck inflation  Profit –push inflation  Inflationary spiral
  24. 24. MEASURES TO CHECK INFLATION  Incresed taxation  Reducing government exp. ?  Restriction on imports  Rationong  Price control  Wage freeze
  25. 25. DEFLATION  Crowther- state in which the value of money is rising i.e prices are falling  Bad trade and unemployment  Losses for producers and businessmen  Fall in investment  Wage cut
  26. 26. EFFECTS OF CHANGES IN PRICES inflation production stimulate deflation Discourage Distribution Business class Fixed income groups Wage earners and salaried investors Rentiers gain Hit hard Lose their jobs Gain but gilt edged lose lose Hit hard not much effect gain lose gain
  27. 27. Inflation is unjust and deflation is inexpedient Any questions ?
  28. 28. THANK YOU HAVE A NICE AND FRUITFULL HOLIDAYS
  29. 29.  YOURS S.MADAN KUMAR M.A.,M.A.,B.Ed.,M.Phil.,M.B.A

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