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TopicMonetary Policy
Group Name : E
What is Monetary Policy….??? Monetary Policy is the process bywhich the monetary authority of acountry controls the supply of money,often targeting the interest rate for thepurpose of promoting economic growthand stability .
According to Harry G. Johnson
“Monetary policy employing the central bank’s control of supply of money as an instrument for achieving the objectives of general economic policy.”
Nature of Monetary Policy…. Monetary policy uses a variety of
tools (interest rate) to control influence outcome like(economic growth , inflation, exchange rate with other currencies and unemployment).
It controls the supply of moneyMonetary policy works through
expansion or contraction of investment and consumption expenditure.
Objectives of Monetary Policy….
There are basically three major objectives of
monetary Policy. Which are:- To ensure price stability. To encourage economic growth. To ensure stability of exchange rate of
money.
Scope of Monetary Policy….
Monetary decisions today take into account a widen
range of factors such : Short term interest rates, Long term interest rates, Exchange rates, Credit quality, Bonds & equities (corporate ownership & debt) Govt. vs. Private sector spending/savings, International capital flows of money on large scale,
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Importance of Monetary Policy……
Regulates currencies and reserves.
Manages the monetary and the credit system.
Maintains the par value of domestic currencies.
Promotes and maintains a high level of production , employment and economic growth.
Ensures balance of equilibrium.Creates full employment.Regulates neutrality of money.Ensures equal income
distribution.
Tools of Monetary Policy…. There are four basic tools or instruments of monetary policy which can be used to achieve economic & price stability by influencing aggregate demand or spending in the economy .These tools are:-
Open market operation. Changing the bank rate. Changing the cash reserve ratio.
Undertaking selective credit controls.
Expansionary Monetary Policy…The following three monetary policy
measures are adopted as a part of an
expansionary monetary policy to cure
recession & to establish the
equilibrium of national income at
full employment level of output.
The central bank undertakes open market operation
The central may lower the bank rate The central bank may reduce cash reserve
ratio
Tight Monetary Policy…The following monetary measures
generally adopted as tight monetary
policy to control inflation
The central bank sells the Government securities
The central bank may raise bank rate The central may raise statutory cash reserve
ratio
MONETARY POLICY :KEYNESIAN VIEWEXPANSIONARY MONETARY POLICY
TIGHT MONETARY POLICY
Problems : Recession & Unemployment
Measures :1. Central bank buys securities through
open market operation
2. It reduces CRR
3. It lowers bank rate
Problem : Inflation
Measures : 1. Central bank sells securities through
open market operation
2. It raises CRR & SLR bank rate
3. It raises maximum margin against holding of stocks of goods
Money supply increase
Interest rate falls
Investment increase
Aggregate demand increase
Aggregate output increase
Money supply decrease
Interest rate decrease
Investment expenditure declines
Aggregate demand declines
price level falls
Role of Monetary Policy in Economic Growth….
Economic growth can be speeded up byaccelerating the rate of savings and
investment inthe economy. This requires the following steps
:
Increase in the aggregate rate of savings, Mobilization of these savings so that they
are made for the purpose of investment and
production, Increase in the rate of investment, Allocation of investment funds for
productive purposes and priority sectors of the
economy.
Monetary Policy in Bangladesh……
As stated in Bangladesh Bank order 1972,the principal objectives of country’s monetary policy are:-
To regulate currency & reserves, To manage the monetary and credit
system, To reserve the par value of domestic
currency, To promote and maintain a high level of
production , employment and real income, To foster growth & development of the
country’s productive resources in the best national interest.
Limitations of Monetary Policy in developing Countries
In developing countries monetary policy suffers from the following limitations :
In under developing countries, the role of monetary policy is not compulsive but permissive.
In under developed society where liquidity trap is in existence can’t work efficiently . Here administrative honesty & firmness are not very rigorous in less regular countries which reduce the efficiency of monetary policy a lot.
Lastly the lag between the decision about a particular policy & implementation also hinders the monetary policy in success.
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