4. Objectives of Monetary
Policy
The main objectives of Monetary Policy are;
Economic Growth
Full Employment
Price Stability
Neutrality of Money
Exchange Rate Stability
5. Economic Growth
An increase in the capacity of an economy to
produce goods and services.
Compared from one period of time to another.
Economic growth creates more profit for
businesses.
6. Full Employment
An economic situation in which all available labor
resources are being used in the most efficient
way possible.
Full employment embodies the highest amount of
skilled and unskilled labor that can be employed
within an economy at any given time
7. Price Stability
An economy means that the general price level in
an economy does not change much over time
Does not Inflation and Deflation
Used to try to keep prices stable
The price level where the supply of money equals
demand for it is the equilibrium price
8. Exchange Rate Stability
In which a currency's value is fixed against
either the value of another single currency.
There are benefits and risks to using a fixed
exchange rate.
It is the fixed rate of currency.
Such as Gold
10. Expansionary Monetary
Policy
Expansionary monetary policy aims to increase
aggregate demand and economic growth in the
economy.
Increase the money supply to boost economic
activity.
Lower Interest rates.
11. Contractionary Monetary
Policy
It is used for contract the money supply and
reduce economic activity.
By raising interest rates to slow the rate of
borrowing by companies, individuals and banks.
Reduces the purchasing power of every dollar and
steals the benefit of higher wages.
12. Tools / Instruments of
Monetary Policy
There are two types of instruments such as:
Quantitative Measures
Qualitative Measures
13. Quantitative Measures:
Open Market Operation
Change in Reserve Requirements
Changes in Reserve Capital
Credit Rationing
Bank Rate Policy
Changes in Marginal Requirements
14. Open Market Operation
Purchase and sale of eligible securities by the
central bank.
At inflation and boom, the central bank sells
securities in the open market and withdraws the
surplus money from circulation.
At deflations and recessions, vice versa
15. Change in Reserve
Requirements
Through this policy the central bank determines
that a certain proportion of cash deposit from
commercial banks is to be deposited with it
(central bank) so that the central bank by this
way influences the volume of credit in country.
Example in some countries, a total of 5 % cash is
to be kept against demand and time deposits in
the central bank
16. If the central bank wants to reduce money supply
it increases the reserve ratio requirement.
If the central bank wants to increase money
supply it decreases the reserve ratio
requirement.
18. Credit Rationing
By credit rationing the central bank fixes the
credit ceiling allowed for each and every
commercial bank and will not give further credit
to them beyond limit allowed
19. Bank Rate
It is the rate at which central bank rediscount
the first class bills.
During the period of inflationcentral bank raises
bank rate.
During the period of deflation and depression
central bank lowers the bank rate.
20. Changes In Margin
Requirements
Marginal requirement is the percentage
difference between the value of the collateral
against the loan and the amount of loan given
itself to the borrower by commercial banks
Example: The collateral is 100 and the loan given
by the bank is 75. thus by this way we can say
that margin requirement is 25%.
22. Direct Action:
This method of control will only be applied when
the previous method has failed.
As, it is now assumed that commercial banks have
now become a threat to the policy, in spite of
moral suasion.
i-e they continue to give loans as usual
23. thus the central bank is forced to take direct
action against these commercial banks
24. Publicity:
From time to time central bank publishes details
concerning commercial banks.
The central bank refers to such measure
specially when the inflation period is getting
worse.
25. The reason for central bank doing this is to keep
the public aware of the commercial bank
activities so that the people actually know to
what and where their money has gone
26. Moral Suasion
Moral suasion means persuasion and request.
To arrest inflationary situation central bank
persuades and request the commercial banks to
refrain from giving loans for speculative and
non-essential purposes.
27. On the other hand, to counteract deflation
central bank persuades the commercial banks
to extend credit for different purposes
