MEANING,OBJECTIVE AND INSTRUMENTS OF MONETARY POLICY
MACRO ECONOMICS
BUSINESS ENVIRONMENT
MEANING OF MONETARY POLICY
POLICY
THROUGH WHICH THE GOVT OR THE CENTRAL BANK OF THE COUNTRY CONTROLS
a) AVAILABILITY
OF MONEY
b) SUPPLY OF
MONEY
c)
COST OF THE MONEY
D.C. ROWAN,” THE
MONETARY POLICY IS DEFINED AS DISCRETIONARY ACTION UNDERTAKEN BY THE MONETARY
AUTHORITIES DESIGNED TO INFLUENCE (a) THE SUPPLY OF MONEY(b) THE COST OF
MONEY(c) THE AVAILABILITY OF MONEY.
OBJECTIVES
1. FULL
EMPLOYMENT: PRINCIPAL OBJECTIVE IN LESS DEVELOPED ECONOMY. FULL EMPLOYMENT
MEANS WHERE ALL COMPETENT PERSONS WHO ARE WILLING TO WORK AT THE PREVAILING
WAGE RATE GET WORK. FOR INCREASING PRODUCTION,EMPLOYMENT AND DEMAND IT ADOPT
CHEAP MONEY POLICY.
2. ECONOMIC
GROWTH:-ECONOMIC DEVELOPMENT MEANS REFERS TO THE PROCESS OF SUSTAINED RISE IN REAL
INCOME CAPITA. IN UNDER DEVELOP ECONOMY THE INCOME AND STANDARD OF LIVING OF
THE PEOPLE IS VERY LOW. FOR INCREASING PRODUCTION CAPACITY,CAPITAL FORMATION
SUITABLE MONETARY POLICY IS ADOPTED
3. PRICE
STABILITY:-PRICE STABILITY MEANS CONTROLLING OF WIDE FLUCTUATIONS IN PRICES.
TWO FACTORS CAUSE PRICE FLUCTUATION LIKE RISE IN DEMAND AND FALL IN PRODUCTION OR RISE IN COST. MONETARY POLICY SEEKS TO ERADICATE BOTH INFLATIONARY AND DEFLATIONARY TENDENCY IN THE SYSTEM
4. EXCHANGE
STABILITY:LINKED WITH STABILITY OF BALANCE OF PAYMENT. EXCHANGE RATE REFERS TO
THE NUMBER OF UNITS OF ANOTHER COUNTRY’S CURRENT THAT CAN BE OBTAINED IN
EXCHANGE FOR ONE UNIT OF DOMESTIC CURRENCY.CHANGES IN FOREIGN RATE ARE VERY
MUCH INFLUENCED BY BALANCE OF PAYMENT. BALANCE OF PAYMENT MEANS DIFFERENCE
BETWEEN TOTAL EXPORT AND TOTAL IMPORT
5. REDUCTION OF
ECONOMIC INEQUALITY:-SOCIETY IS DIVIDED INTO RICH AND POOR, MONETARY POLICY
SERVES AS INSTRUMENT OF ACHIEVING EQUITABLE DISTRIBUTION OF INCOME AND
WEALTH
INSTRUMENTS OF MONETARY POLICY
1. SUPPLY OF
MONEY: REFERS TO THE CURRENCY ISSUED BY THE MONETARY AUTHORITY AND DEMAND
DEPOSITS LYING IN THE BANKS OF THE COUNTRY. ADOPT FLEXIBLE METHOD OF NOT ISSUE
SUCH AS MINIMUM RESERVE FUND
2. COST OF
MONEY: OR RATE OF INTEREST: UNDER DEVELOP COUNTRY CHEAP MONEY POLICY IN PRIORITY SECTOR,AGRICULTURE AND DEAR MONEY POLICY FOR UNPRODUCTIVE PURPOSE
3. AVAILABILITY
OF MONEY :THE AVAILABILITY OF MONEY MEANS AS THE EASE WITH WHICH AT ANY GIVEN
RATE OF INTEREST ,MONEY CAN BE BORROWED FROM FINANCIAL INSTITUTIONS.
METHODS OF CREDIT CONTROL
TWO METHODS OF CREDIT CONTROL:-
1. QUANTITATIVE CREDIT CONTROL:CONTROLLING OF TOTAL VOLUME OF THE CREDIT IN THE COUNTRY
2. QUALITATIVE
CREDIT CONTROL: REGULATING THE AMOUNT OF CREDIT FOR CERTAIN SELECTIVE PURPOSE
QUANTITATIVE CREDIT CONTROL
1. BANK RATE
2. OPEN MARKET
OPERATIONS
3. CHANGE IN
MINIMUM RESERVE FUND
4. CHANGE IN
LIQUIDITY RATIO
BANK RATE
MEANING
- IMPORTANT
WEAPON OF CREDIT CONTROL
- MINIMUM RATE OF
INTEREST AT WHICH THE CENTRAL BANK OF THE COUNTRY IS WILLING TO DISCOUNT
THE FIRST GRADE SECURITIES OF OTHER BANKS OR
- LENDS ON
APPROVED SECURITIES
- RISE IN BANK
RATE RISE THE INTEREST RATE AND VICE VERS
CONTRACTION
OF CREDIT:- RAISES THE BANK RATE IN SITUATION OF INFLATION
EXPANSION OF
CREDIT BY LOWERING THE RATE OF BANK OF BANK RATE FOR CONTROLLING THE DEFLATION
OPEN MARKET OPERATIONS
MEANING
1. CONSISTS OF
PURCHASE AND SALE OF SECURITIES IN THE OPEN MARKET
2. CONTRACTION
OF CREDIT FOR THE PURPOSE OF CONTROLLING THE INFLATION:- CENTRAL BANK BEGINS TO
SELL THE SECURITIES. AGGREGATE DEMAND GOES ON CONTRACTING
3. EXPANSION OF
CREDIT FOR THE PURPOSE OF CONTROLLING TH DEFLATION:- BEGINS TO PURCHASE THE
SECURITIES. CREDIT EXPANDS AND AD GOES ON INCREASING
CHANGES IN MINIMUM RESERVE FUND: ALL BANKS ARE REQUIRED TO KEEP A GIVEN
PERCENTAGE OF THEIR TOTAL DEPOSITS SUCH AS CASH RESERVE WITH CENTRAL BANK. FOR
CONTRACTING OF CREDIT,THIS RATIO WILL BE RAISED OR VICE VERSA
CHANGES IN LIQUIDITY RATION:-KEEP A GIVEN PROPORTION OF ITS DEPOSITS AS
CASH WITH ITSELF KNOWN AS LIQUIDITY RATIO. FOR CONTROLLING INFLATION THIS
RATION WILL BE RAISED OR VICE VERSA
QUALITATIVE OR SELECTIVE CREDIT CONTROL
CHANGES IN MARGIN REQUIREMENT:-FOR CONTROLLING THE CREDIT THE MARGIN IS
INCREASED OR DECREASED
RATIONING THE CREDIT: CENTRAL BANK IS THE LENDER OF THE LAST RESORT
IN THE COUNTRY. RATIONING OF THE CREDIT IS DONE
1. DECLINE LOAN
TO ANY GIVEN BANK
2. REDUCE THE
AMOUNT OF LOAN GIVEN TO ALL THE BANKS
3. CAN FIX THE
QUOTA OF THE CREDIT GIVEN TO DIFFERENT BANKS
4. CAN FIX THE
LIMIT OF THE CREDIT GIVEN TO INDUSTRY AND TRADE
DIRECT ACTION:DOES NOT GIVE ANY FINANCIAL ACCOMMODATING TO ANY
BANK THAT DOES NOT COMPLY WITH ITS INSTRUCTION
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