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Unit 13: Macro Economic Policies: Monetary Policy

4. Moral Suasion or Advice: In the recent year, the central bank has used moral suasion as a Notes
tool of credit control. Moral persuasion is a general term describing a variety of informal
method used by the central bank to persuade commercial banks to behave in a particular
manner. Moral suasion takes the form of directive and publicity. In fact, moral persuasion
is a sort of advice. There is no element of compulsion in it. The central bank focuses on the
dangerous consequences of the credit expansion and seeks their cooperation. The
effectiveness of this method depends on the prestige enjoyed by the central bank on the
degree of cooperation extended by the commercial banks.
5. Publicity: Publicity is also another qualitative technique. It means to force them to follow
only that credit policy which is in the interest of the economy. The publicity generally
takes the form of periodicals and journals. The banks are not kept informed about the type
of monetary policy, the central bank regards good for the economy. Therefore, the main
aim of this method is to bring the banking community under the pressure of public
opinion.

Self Assessment

Multiple Choice Questions:
5. Expansionary monetary policy requires purchasing of government securities in the open
market by the .............................................
(a) Firms (b) Finance Ministry
(c) Central Bank (d) Individuals
6. A ................................. monetary policy involves selling government securities by central
bank in the open market.
(a) Expansionary (b) Contractionary
(c) Aggressive (d) Restrictive

7. .................................... refers to that rate at which a central bank is ready to lend money to
commercial banks.
(a) Bank rate (b) Cash ratio

(c) Repo rate (d) Inflation
8. Which of these is a qualitative instrument of monetary policy?
(a) Discount rate (b) Open market operations

(c) Cash Reserve Ratio (d) Moral suasion
13.3 Transmission of Monetary Policy

There is no unanimous view about the way monetary policy operates. This is perhaps because of
the fact that there is no unanimous opinion about the role of money.

According to the traditional quantity theory of money, the monetary policy affects the price
levels because of constancy in (a) the volume of transactions, and (b) the velocity of circulation
of money. Fisher’s equation of exchange postulates an identity between the demand for and of
supply of money. The supply of money is determined by the product of stock of money, M, with
its velocity of circulation, V. The demand for money, on the other hand, is the product of volume
of transactions, T, to be undertaken and the general price level, P.

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