Monetary policy involves controlling the supply of money and interest rates to achieve economic goals like price stability and growth. The monetary authority, such as a central bank, uses various tools to influence factors such as inflation, employment, and economic output. Expansionary policy increases the money supply to boost the economy during recessions, while contractionary policy decreases the supply to curb inflation. In India, the Reserve Bank of India pursues monetary policy goals like price stability through instruments affecting bank reserves, lending rates, and money circulation.
2. Monetary policy is the process by
which the monetary authority of a
country controls the supply of
money, often targeting the purpose
of promoting economic growth
and stability.
Main targets: 1) stabilizing prices
2) low unemployment
Monetary authority of a country
controls
(i) the supply of money,
(ii) availability of money, and
(iii) cost of money or rate of
interest
to attain a set of objectives
oriented towards the growth and
stability of the economy
3. Expansionary policy increases the total
supply of money in the economy more
rapidly than usual.
Expansionary policy is traditionally used
to try to combat unemployment in a
recession by lowering interest rates in the
hope that easy credit will entice
businesses into expanding.
4. Contractionary policy expands the
money supply more slowly than usual or
even shrinks it.
Contractionary policy is intended to slow
inflation in order to avoid the resulting
distortions and deterioration of asset
values.
5. Gross National Product (GNP) = C + I + G + X
Where: C = Private Consumption expenditure
I = Private Investment Expenditure
G = Government Expenditure
X = Net Exports
C, I, X can be influenced by the monetary policy
which can also influence the private consumption
and investment spending and exports and
imports.
6. Monetary policy rests on the relationship between
the rates of interest in an economy, that is the price
at which money can be borrowed, and the total
supply of money.
Monetary policy uses a variety of tools to control
one or both of these, to influence outcomes like
economic growth, inflation, exchange rates with
other currencies and unemployment.
7. Monetary Policy: Target Market Variable:
Inflation Targeting Interest rate on overnight debt
Price Level Targeting Interest rate on overnight debt
Monetary Aggregates The growth in money supply
Fixed Exchange Rate The spot price of the currency
Gold Standard The spot price of gold
Mixed Policy Usually interest rates
8. In India, the central monetary authority is
the Reserve Bank of India (RBI) is so
designed as to maintain the price stability in
the economy.
Other objectives:
(i) Price Stability
(ii) Controlled Expansion Of Bank
Credit
(iii) Restriction of Inventories, etc.,
9. CRR (Cash Reserve Ratio): fraction of deposits
that banks must keep with RBI
SLR (Statutory Liquidity Ratio): It is the amount
that the commercial banks require to maintain
in the form of gold or govt. approved securities
before providing credit to the customers
• To ensure solvency of the banks
• A reduction of SLR rates looks eminent to
support credit growth in India
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10. Bank rate: It is the rate at which the
Reserve Bank of India lends to
commercial banks and other
financial institutions for meeting
shortfalls in their reserve
requirements, for long-term purposes.
Repo rate: Banks borrow money from
RBI on repo rate
Reverse Repo rate: RBI accepts banks
surplus at reverse repo rates
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11. • Quantitative Policy
volume of money in
circulation
1. Reserve Ratio
2. Open Market operation
3. Bank Rate
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