Page 242 - DECO402_Macro Economics

Unit-27: Monetary Policy

27.2 Objectives and Goals of Monetary Policy Notes

Main objectives of monetary policy are as follows:
1. Full Employment: Full employment has been kept under the main objectives of monetary
policy. It is an important objective because by unemployment not only there is a loss of
possible production but by it social prestige and self respect is also hurt. Apart from this it
creates poverty. That is why attaining full employment is extremely important.

Notes Monetary policy is in the form of a tool to control the supply of money by the
central bank with for achieving the objectives of general economic policies.

2. Price Stability: Bringing stability in price level is one of the main objectives of monetary
Policy.
3. Economic Growth: In the recent years one of the most important objectives of monetary
policy had been that there should be a fast economic development of the economy.
4. Balance of Payments: Since the decade of 1950 another objective of monetary policy had
been to maintain a balance of payment.

Self Assessment
Fill in the blanks:
1. Full employment has been kept under the main ............ of monetary policy.
2. When prices start rising and there is a need to stop them then central bank sells ..............

27.3 Instruments of Monetary Policy

Monetary policy is related to credit control measures adopted by the central bank. Is of two types:
(1) Quantitative-general and indirect control; and (2) Qualitative. – selective or direct control. Under
first category changes in bank rates, operations of open markets and changeable reserve requirements
are included. Their objective is to regulate complete level of credit in the economy through the
medium of commercial banks. In it changeable limit requirements and regulation of consumer credit
are included.
1. Bank Rate Policy: Bank rate is that minimum rate of loan giving by the central bank at which
it re-discounts the first category hundies of exchanges and government securities adopted
by the commercial banks. When central bank sees that inflationary pressures have started
showing in the economy, it increases bank rates. Taking loan from central bank becomes
expensive and commercial banks will comparatively take fewer loans from it. Commercial
banks will increase their rate to giving loans to traders. That is why those taking loans will
take fewer loans from commercial banks. Contraction of credit takes place and prices stop
from rising further. As opposed to it when prices fall, then central bank reduces its bank
rate. It is cheaper of commercial banks to take loan from central bank, and then commercial
banks also reduce their rate of lending. By it traders are motivated to take more loans.
Investment is induced. Production, employment, income and demand start to increase and
prise stop falling.

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