Page 238 - DECO201_MACRO_ECONOMICS_ENGLISH

Unit 13: Macro Economic Policies: Monetary Policy

The RBI said various business expectation surveys also see moderation over the previous quarter Notes
and year, indicating a slowdown in overall economic activity. Besides persistent inflation,
which was the significant factor that affected business expectations, global uncertainty, higher
input costs, higher interest rates and expectation of lower demand for finished goods also
impacted the business sentiment of India Inc.
Self Assessment

State whether the following statements are true or false:
14. Changes in velocity of money greatly influence the effectiveness of monetary policy.
15. Monetary policy has an immediate effect on aggregate demand.
16. The time lags must be reduced to ensure economic growth with stability.

13.5 Summary

Monetary policy is a very important economic tool of Macro Economic policy. It plays a
pioneering and dynamic role in accelerating economic growth with stability and social
justice.
It is formulated and implemented by the central banks through a wide network of financial
institutions for achieving various objectives such as full employment, stability of exchange
rate, control of business cycles, price stability and equitable distribution of national income.
Expansionary monetary policy requires purchasing of government securities in the open
market by the central banks. A contractionary monetary policy involves selling government
securities by central bank in the open market.

The instruments of monetary policy can be categorised as: (i) quantitative methods- bank
rate, open market operations, variable reserve ratio, change in liquidity, (ii) qualitative
methods- change in margin requirement, direct action, rationing, moral suasion and
publicity.
The relative importance of growth and price stability as the objective of monetary policy
as well as the appropriate intermediate target of monetary policy became the focus of
attention.

An understanding of the mechanism of monetary policy enables a manager to anticipate
the direction of impact of changes in monetary variables and make proper adjustments in
business accordingly.
13.6 Keywords

Bank Rate: Interest rate charged by a country’s central bank on loans and advances so as to
control money supply in the economy and the banking sector.

Capital Adequacy Ratio: A measure of the amount of a bank’s core capital expressed as a
percentage of its assets weighted credit exposures.
Liquidity Trap: A situation in which prevailing interest rates are low and savings rates are high,
making monetary policy ineffective.
Monetary Policy: The regulation of the money supply and interest rates by a central bank.
Open Market Operations: The buying and selling of government securities by a central bank.

LOVELY PROFESSIONAL UNIVERSITY 233