Page 245 - DECO402_Macro Economics

Macroeconomic Theory

Notes in form of a tool for more stability became the causes of collapse of monetary policy. Keynes told
that more flexibility liquidity preference schedule (liquidity net) presents monetary policy in form of
helpless at the time of sharp depression.

Self Assessment

Multiple Choice Questions:
3. Bringing stability in price level is one of the ................ of monetary policy.
(a) main objectives (b) main work
(c) plan (d) none of these
4. Attaining full employment is.................
(a) important (c) extremely important
(c) main work (d) none of these
5. .................... are brought in use to control special type of credit with specific objectives.
(a) selective credit controls (b) objective
(c) specific areas (d) none of these
6. Central banks start expansionary monetary policy which makes the conditions of credit
markets...............
(a) difficult (b) easy
(c) changeable (d) none of these

27.5 Restrictive Monetary Policy

Monetary policy made for reducing the entire demand is known by the name of restrictive (or
expensive) monetary policy. It is used to come out of an inflationary gap. Due to increase of consumer
demand for goods and services, inflationary pressures are created in the economy and because of it
boom also comes in trade investment. By increasing the cost and availability of bank credit for reducing
entire consumption and investment central bank starts restrictive monetary policy. Central bank may
do so by selling government securities in the open market, by increasing the reserve requirements
of member banks, by increasing the discount rates and by controlling the consumer and trade credit
through selective measures. Through these measures central bank increases the cost and availability
of credit in the open market and by which it controls the inflationary pressure.

Its Scope and Limitations

But field of inflation in monetary policy is very limited in inflation control. Its limitations are as
follows:
1. Increase in Velocity of Money: There is an important limit of effectiveness of monetary
policy in stopping inflation- increase in velocity of money kept with the public. Central bank,
through expensive monetary policy, may control money supply and cost of money but it has
no such power by which it may stop the velocity of money. public may effectively bring in
use money supply available with it as a result of which restrictive monetary policy becomes
unsuccessful. It may be done in many ways.
a. Commercial Banks Portfolio Adjustment: When restrictive monetary policy is on, then commercial
banks fulfil the demands of borrowers for loans by selling government securities to the central

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