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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.