Impact Of Monetary & Fiscal Policy

Presented By: Nisha Moza Sec : 2701 Roll no : 51

Monetary policy
Monetary policy is the process by which the monetary authority of a country controls the supply of money, often targeting a rate of interest for the purpose of promoting economic growth and stability

Objectives Of Monetary Policy

Maintain price Stability.
Flow of credit to the productive sectors of the economy. Stability for the national currency.

Growth in employment and income.

To promote and encourage economic growth in the country.

Instruments of Monetary Policy

SLR

Bank rate

Open market operations

QUANTITATIVE

Cash Reserve Ratio

Contd.
QUALITATIVE

Credit Rationing

Change in Lending margins

Moral Suasion

Direct Controls

Quantitative Instruments
Open Market Operations (OMO): It means the purchase and sale of securities by the central bank of the country. The OMO is the most powerful and widely used tool of monetary control. Bank Rate: Bank rate is the rate at which the central bank rediscounts the bills of exchange presented by the commercial banks. For practical purposes bank rate is the rate which the central bank charges on the loans and advances to the commercial banks.

Contd.
The Cash Reserve Ratio (CRR): Cash Reserve Ratio is the percentage of total deposits which commercial banks are required to maintain in the form of cash reserve with the central bank. Statutory Liquidity Requirement (SLR): The SLR Is that proportion of the total deposits which commercial banks are required to maintain with them in the form of liquid assets (cash reserve, gold and govt. bonds) in addition to CRR.

Qualitative Instruments
Credit Rationing: Under this two measures are adopted: Imposition of upper limits on the credit available to large industries and firms. Charging a higher interest rate on bank loans beyond a certain limit.
Change In Lending Margins: The banks provide loans only upto a certain percentage of the value of the mortgaged property. The gap between the value of the mortgaged property and amount advanced is called lending margin.

Contd.
Moral Suasion: The moral suasion is a method of persuading and convincing the commercial banks to advance credit in accordance with the directive of the central bank in the economic interest of the country. Direct controls: Where all other methods prove ineffective, the monetary, authorities resort to direct control measures with clear directive to the banks carry out their lending activity in a specified manner.

Types of monetary policy

Contractionary, restrictive or tight monetary policy Expansionary or cheap monetary policy

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

Use of Open Market operation

In the inflationary situation In the depressionary situation

Central bank decrease the money supply. Central bank sale out the securities to commercial bank and control money supply.

Central bank increase the money supply. Central bank purchase the securities from the commercial bank.

Use of C.R.R. & S.L.R

In the inflationary situation Increased the percentage of cash reserve ratio and Statutory liquidity ratio It reduces the supply of money in an economy In Depressionary situation Decreased the percentage of cash reserve ratio and Statutory liquidity ratio It increases the supply of money in an economy

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.

Fiscal Policy-Meaning
The word fisc means state treasury and fiscal policy refers to policy concerning the use of state treasury or the govt. finances to achieve the macroeconomic goals. any decision to change the level, composition or timing of govt. expenditure or to vary the burden ,the structure or frequency of the tax payment is fiscal policy. - G.K. Shaw

Fiscal Policy And Macroeconomic Goals

Economic Growth: By creating conditions for increase in savings & investment. Employment: By encouraging the use of labourabsorbing technology Stabilization: fight with depressionary trends and booming (overheating) indications in the economy Economic Equality: By reducing the income and wealth gaps between the rich and poor. Price stability: employed to contain inflationary and deflationary tendencies in the economy.

Instruments of Fiscal Policy

Public Expenditure Taxation Public Debt

PUBLIC EXPENDITURE
Government spending Productive Non-Productive

Types
Pump priming Compensatory spending

The government spending which will have the effect of setting the economy going on the way towards full utilization of resources. Example:- Government Expenditure, building infrastructure etc.

The government spending which will have the effect of setting the social objective and payment of interest on debt. Example:- schools, hospitals, pensions, relief payments etc.

Government Expenditure
It includes : Government spending on the purchase of goods & services. Payment of wages and salaries of government servants Public investment Transfer payments

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

TAXATION
Meaning: Source of Revenue Helps Gov. to do there exp. Generated from public Classified into: 1. Direct taxes- Corporate tax, Div. Distribution Tax, Personal Income Tax, Fringe Benefit taxes, Banking Cash Transaction Tax 2. Indirect taxes- Central Sales Tax, Customs, Service Tax, excise duty.

Effect of Taxation
Reduction in taxation
Increase the disposable income. Increase the consumption power. Use for offsetting the deflation forces

Increase in Taxation
Decrease the disposable income. Decrease the consumption power. Use for offsetting the inflation forces.

Public debt
When Gov. exp. are more then Gov. revenue Government take Public Debt.
Internal borrowings 1. Borrowings from the public by means of treasury bills and govt. bonds 2. Borrowings from the central bank (monetized deficit financing) External borrowings 1. foreign investments 2. international organizations like World Bank & IMF 3. market borrowings

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.

Types of fiscal policy

Expansionary fiscal policy is defined as an increase in government expenditures and/or a decrease in taxes that causes the government's budget deficit to increase or its budget surplus to decrease. Contractionary fiscal policy is defined as a decrease in government expenditures and/or an increase in taxes that causes the government's budget deficit to decrease or its budget surplus to increase.

Thank You
We need faster growth because, at our level of incomes, there can be no doubt that we must expand the production base of the economy if we want to provide broad-based improvement in the material conditions of living of our population, .......... But growth alone is not enough if it does not produce a flow of benefits that is sufficiently wide-spread. We, therefore, need a growth process that is much more inclusive, .......... and which also ensures access to essential services such as health and education for all sections of the community. -Dr. Manmohan Singh, Prime Minister