136497785 Monetary Policy Ppt

8/13/2019 136497785 Monetary Policy Ppt

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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.


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Objective

Stability in price level

Economic development

Arrangement of full employment

Expansion of credit facility

Equality & Justice

Stability in exchange rate


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INSTRUMENTS

GENERAL (QUANTITATIVE) Methods

SELECTIVE (QUALITATIVE) Methods


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GENERAL (QUANTITATIVE) Methods

Meaning:-

These methods help in credit control in theeconomy.

Affect total quantity of the credit.


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Types

A. Bank rate policy

B. Open market policy

C. Cash reserve ratio

D. Statuary reserve ratio


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Bank Rate policy

Traditional approach:- Bank rate means on

which central bank discounts and rediscount

the eligible bills.

Todays 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 ofthe last resort.


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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


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Open Market operation

Its include the sales and purchase by the central

bank of .

Assets

Foreign exchange

Gold

Government securitiesCompany securities


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Use of Open Market operation

In the inflationary situation

Central bank decrease the

money supply.

Central bank sale out thesecurities to commercial

bank and control money

supply.

In the depressionary situation

Central bank increase the

money supply.

Central bank purchase thesecurities from the

commercial bank.


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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 framedby central bank of a country.


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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 framedby central bank of a country.


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

In Inflationary situation

o Increased the percentage of

cash reserve ratio and

Statutory liquidity ratioo It reduces the supply of

money in an economy

In Depressionary situation

o Decreased the percentage

of cash reserve ratio and

Statutory liquidity ratioo It increases the supply of

money in an economy


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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.


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Specific or qualitative Credit Control

Adopt for expansion and contraction of creditto attain specific objective.


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Methods of qualitative credit control

Credit rationing

Change in margin

Direct action


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MEANING

Measures related to taxation & publicexpenditure are normally called fiscalmeasures and the policy concerning them as

known as FISCAL POLICY.

In short, fiscal policy or budgetary policyconsists of steps & measures which thegovernment in order to fulfill the aims ofeconomic policy.


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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.


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INSTRUMENTS

PUBLIC EXPENDITURE

TAXATION

PUBLIC DEBT


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PUBLIC EXPENDITURE

Meaning:-

Government spending

Productive

Non-Productive


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Types

PUMP PRIMING

The government spending

which will have the effect of

setting the economy goingon 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 objectiveand payment of interest on

debt.

Example:- schools,

hospitals, pensions, relief

payments etc.


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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


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TAXATION

Meaning:-

Source of Revenue

Helps Gov. to do there exp.

Generated from public


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Types of Tax

Direct Tax

Direct tax are those tax

which a person pay to

government directly forhimself 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.


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Effect of Taxation

Reduction in taxation

Increase the disposable

income.

Increase the consumptionpower.

Use for offsetting the

deflation forces

Increase in Taxation

Decrease the disposable

income.

Decrease the consumptionpower.

Use for offsetting the

inflation forces.


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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.


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Types of public debt

Borrowing from public

Borrowing from commercial bank

Issue of new currency


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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.

136497785 Monetary Policy Ppt

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