MONETARY POLICY

MEANING Monetary policy is an instrument which effect the credit flow in an economy. The variation effect the demand & supply of credit in an economy, and the level or nature of economic activities.

Objective Stability in price level Economic development Arrangement of full employment Expansion of credit facility Equality & Justice Stability in exchange rate

INSTRUMENTS GENERAL (QUANTITATIVE) Methods SELECTIVE (QUALITATIVE) Methods

GENERAL (QUANTITATIVE) Methods Meaning:- These methods help in credit control in the economy. Affect total quantity of the credit.

Types Bank rate policy Open market policy Cash reserve ratio Statuary reserve ratio

Bank Rate policy Traditional approach:- Bank rate means on which central bank discounts and rediscount the eligible bills. Today’s approach:- Bank rate means the minimum rate on which central bank provides financial accommodation to commercial bank in the discharge of its function as the lender of the last resort.

Effect of Bank rate Increase in bank rate Decrease in bank rate Increase in bank rate charge by the central bank on its advance to commercial bank. Commercial bank increase the rate of interest on their loan. Demand for the credits and loan decrease. Flow of the money decrease in the economy Use in inflationary situation Decrease in bank rate charge by the central bank on its advance to commercial bank. Commercial bank decrease the rate of interest on their loan. Demand for the credits and loan increase. Flow of the money increase in the economy Use in depression situation

Open Market operation Its include the sales and purchase by the central bank of …. Assets Foreign exchange Gold Government securities Company securities

Use of Open Market operation In the inflationary situation In the depressionary situation Central bank sell out the securities to commercial bank and control money supply. Central bank decrease the money supply. Central bank purchase the securities from the commercial bank. Central bank increase the money supply.

Cash Reserve Ratio Commercial bank has to keep a certain percentage of its total deposits with central bank. It control the cash flow in economy. It keeps changing in monetary policy framed by central bank of a country.

STATUARY LIQUIDITY RATIO Commercial bank is to keep a certain percentage of its total deposits as liquid asset. It control the cash flow in economy. It keeps changing in monetary policy framed by central bank of a country.

Use of C.R.R. & S.L.R In Inflationary situation In Depressionary situation Increased the percentage of cash reserve ratio and Statutory liquidity ratio It reduces the supply of money in an economy Decreased the percentage of cash reserve ratio and Statutory liquidity ratio It increases the supply of money in an economy

Function of credit regulation the quantitative methods For expansion of credit For contraction of credit Reduce the bank rate Purchase of securities Reduce the C.R.R. Reduce the S.L.R. Increase the bank rate sales of securities Increase the C.R.R. Increase the S.L.R.

Specific or qualitative Credit Control Adopt for expansion and contraction of credit to attain specific objective.

Methods of qualitative credit control Credit rationing Change in margin Direct action

FISCAL POLICY

MEANING Measures related to taxation & public expenditure are normally called fiscal measures and the policy concerning them as known as FISCAL POLICY. In short, fiscal policy or budgetary policy consists of steps & measures which the government in order to fulfill the aims of economic policy.

Objective of fiscal policy To achieve and maintain the full employment in the economy. Attain Economic growth in long term. Achieve economic stability. To guide the allocation of existing resources into socially necessary lines of development.

INSTRUMENTS PUBLIC EXPENDITURE TAXATION PUBLIC DEBT

PUBLIC EXPENDITURE Meaning:- Government spending Productive Non-Productive

Types PUMP PRIMING COMPENSATORY SPENDING The government spending which will have the effect of setting the economy going on the way towards full utilization of resources. Example:- Gov Expenditure, building infrastructure etc. The government spending which will have the effect of setting the social objective and payment of interest on debt. Example:- schools, hospitals, pensions, relief payments etc.

EFFECT Gov. exp should be reduced in inflation and increased during depressions in case of a deflationary situation in an economy. Therefore it act as a balancing factor between saving & investment

TAXATION Meaning:- Source of Revenue Helps Gov. to do there exp. Generated from public

Types of Tax Direct Tax Indirect tax Direct tax are those tax which a person pay to government directly for himself and can not enforce on other. For example:- income tax, wealth tax etc. Indirect tax are those tax which a person can on others. For example:- service tax, sales tax.

Effect of Taxation Reduction in taxation Increase in Taxation Increase the disposable income. Increase the consumption power. Use for offsetting the deflation forces Decrease the disposable income. Decrease the consumption power. Use for offsetting the inflation forces.

Public Debt When Gov. exp. are more then Gov. revenue Government take Public Debt. Deficit financing = Gov. exp. – Gov. revenue. Government take the public debt to fulfill the gap between the Gov exp and the revenue.

Types of public debt Borrowing from public Borrowing from commercial bank Issue of new currency

Effect Public Debt effect the inflation and deflation If government take the borrowing from public and banks it will decrease the cash flow in the market and increase the deflation. If there is depression in economy government repay the debt the public which increase the cash flow of the money in market.

Some facts and figures Monetary policy is been framed by…………… Fiscal policy is been framed by……………… Present governor of R.B.I…………………… Present Finance minister of India………………. Current S.L.R……………………. Current C.R.R………………….. Monetary policy in India framed under which act……………………….

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