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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 levelEconomic developmentArrangement of full employmentExpansion of credit facilityEquality & JusticeStability 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

A. Bank rate policy

B. Open market policy

C. Cash reserve ratio

D. 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 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 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 ….

AssetsForeign exchangeGoldGovernment securitiesCompany securities

Use of Open Market operation

In the inflationary situation Central bank decrease the

money supply. Central bank sale out the

securities to commercial bank and control money supply.

In the depressionary situation Central bank increase the

money supply. Central bank purchase the

securities from the commercial bank.

Cash Reserve Ratio

Commercial bank has to keep a certain percentage of his deposits with central bank.

It control the cash flow in economy.

It keeps changes in monetary policy framed by central bank of a country.

STATUARY LIQUIDITY RATIO

Commercial bank is to keep a certain percentage of his deposit as liquid asset.

It control the cash flow in economy.

It keeps changes in monetary policy framed by central bank of a country.

Use of C.R.R. & S.L.R

In Inflationary situationo Increased the percentage of

cash reserve ratio and Statutory liquidity ratio

o It reduces the supply of money in an economy

In Depressionary situationo Decreased the percentage

of cash reserve ratio and Statutory liquidity ratio

o It increases the supply of money in an economy

Function of credit regulation the quantitative methods

For expansion of credit Reduce the bank rate Purchase of securities Reduce the C.R.R. Reduce the S.L.R.

For contraction of credit 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

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 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.

COMPENSATORY SPENDING 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 RevenueHelps Gov. to do there exp.Generated from public

Types of Tax

Direct 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• Indirect tax are those tax

which a person can on others.

• For example:- service tax, sales tax.

Effect of Taxation

Reduction in taxation Increase the disposable

income. Increase the consumption

power. Use for offsetting the

deflation forces

Increase in Taxation 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 publicBorrowing from commercial bankIssue 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……………………….