View
230
Download
0
Category
Preview:
Citation preview
8/13/2019 2 Monetary & Fiscal Policy
1/24
MONETARY AND FISCAL POLICIES
GLOBONOMICS & CONTEMPORARY MACRO ECONOMIC ISSUES
INFINITY BUSINESS SCHOOL
MONETARY POLICY & FISCAL POLICY
8/13/2019 2 Monetary & Fiscal Policy
2/24
GLOBONOMICS & CONTEMPORARY MACRO ECONOMIC ISSUES
INFINITY BUSINESS SCHOOL
Monetary Policy
Monetary policyis the process by which
the monetary authority of a country
controls the
i. supply of money,
ii. availability of money, and
iii. cost of money or rate of interest
It rests on the relationship between therates of interest, that is, the price at which
money can be borrowed, and the total
supply of money.
8/13/2019 2 Monetary & Fiscal Policy
3/24
GLOBONOMICS & CONTEMPORARY MACRO ECONOMIC ISSUES
INFINITY BUSINESS SCHOOL
Monetary Policy
It aims to attain a set of objectives
oriented towards the growth and
stability of the economy. The official goals usually include
relatively stable prices and low
unemployment.
8/13/2019 2 Monetary & Fiscal Policy
4/24
GLOBONOMICS & CONTEMPORARY MACRO ECONOMIC ISSUES
INFINITY BUSINESS SCHOOL
Expansionary Monetary Policy
An expansionary policy increases the total
supply of money in the economy more
rapidly than usual
It decreases the interest rate Therefore consumers save less and opt for
current consumption over future
consumption.
This, in turn, causes demand to strengthen. It is intended to slow down unemployment
8/13/2019 2 Monetary & Fiscal Policy
5/24
GLOBONOMICS & CONTEMPORARY MACRO ECONOMIC ISSUES
INFINITY BUSINESS SCHOOL
Contractionary Monetary Policy
A contractionary policy expands the money
supply more slowly than usual or even
shrinks it.
It raises the interest rate
Consumers find it more lucrative to save
than spend reducing aggregate demand
It is intended to slow inflation in hopes ofavoiding the resulting distortions and
deterioration of asset values.
8/13/2019 2 Monetary & Fiscal Policy
6/24
GLOBONOMICS & CONTEMPORARY MACRO ECONOMIC ISSUES
INFINITY BUSINESS SCHOOL
INSTRUMENTS OF MONETARY POLICY
1. Open Market Operations
2. Bank Rate
3. Cash Reserve Ratio
4. Statutory Liquidity Ratio
5. Margin Requirements
6. Deficit Financing
7. Credit Control
8. Moral Suasion
9. Exchange Rate
8/13/2019 2 Monetary & Fiscal Policy
7/24
GLOBONOMICS & CONTEMPORARY MACRO ECONOMIC ISSUES
INFINITY BUSINESS SCHOOL
Open Market Operations
It refers to the buying and selling of
Govt. securities in the open market.
During inflation, RBI sells securities inthe open market which leads to transfer
of money to the RBI.
Thus money supply is reduced in the
economy thereby reducing aggregatedemand
8/13/2019 2 Monetary & Fiscal Policy
8/24
GLOBONOMICS & CONTEMPORARY MACRO ECONOMIC ISSUES
INFINITY BUSINESS SCHOOL
Bank Rate
It is the interest rate at which the RBI lends
to the Commercial banks .
During Inflation , RBI increases the bank
rate of interest due to which borrowingpower of commercial banks reduces which
thereby reduces the supply of money or
credit in the economy .
When Money supply reduces, it reducesthe purchasing power and thereby
curtailing Consumption and lowering
Prices.
8/13/2019 2 Monetary & Fiscal Policy
9/24
GLOBONOMICS & CONTEMPORARY MACRO ECONOMIC ISSUES
INFINITY BUSINESS SCHOOL
Cash Reserve Ratio
CRR, or cash reserve ratio, refers to a
portion of deposits which banks have to
keep/maintain (as cash) with the RBI.
During Inflation RBI increases the CRR dueto which commercial banks have to keep a
greater portion of their deposits with the
RBI
This ensures that a portion of bank depositsis totally risk-free and it enables RBI to
control liquidity in the system, and thereby,
inflation.
8/13/2019 2 Monetary & Fiscal Policy
10/24
GLOBONOMICS & CONTEMPORARY MACRO ECONOMIC ISSUES
INFINITY BUSINESS SCHOOL
Statutory Liquidity Ratio
Banks are required to invest a certain
portion of their deposits in government
securities as a part of their statutory
liquidity ratio (SLR) requirements .
If SLR increases, the lending capacity of
commercial banks decreases thereby
regulating the supply of money in theeconomy.
8/13/2019 2 Monetary & Fiscal Policy
11/24
GLOBONOMICS & CONTEMPORARY MACRO ECONOMIC ISSUES
INFINITY BUSINESS SCHOOL
Margin Requirements
During Inflation, RBI fixes a high rate of
margin on the securities kept by the
public for loans .
If the margin increases, the commercial
banks will give less amount of credit on
the securities kept by the public therebycontrolling inflation.
8/13/2019 2 Monetary & Fiscal Policy
12/24
GLOBONOMICS & CONTEMPORARY MACRO ECONOMIC ISSUES
INFINITY BUSINESS SCHOOL
Deficit Financing
It means printing of new currency notes
by Reserve Bank of India .
This will increase the supply of money
thereby increasing demand and prices.
Thus during Inflation, RBI will stop
printing new currency notes thereby
controlling inflation.
8/13/2019 2 Monetary & Fiscal Policy
13/24
GLOBONOMICS & CONTEMPORARY MACRO ECONOMIC ISSUES
INFINITY BUSINESS SCHOOL
Credit Control
The Central Bank can direct banks on
the maximum percentage or amount of
loans (credit ceilings) to differenteconomic sectors or activities, interest
rate caps, liquid asset ratio and issue
credit guarantee to preferred loans.
In this way the available saving isallocated and investment is directed in
particular directions.
8/13/2019 2 Monetary & Fiscal Policy
14/24
GLOBONOMICS & CONTEMPORARY MACRO ECONOMIC ISSUES
INFINITY BUSINESS SCHOOL
Moral Suasion
The Central Bank issues licenses or
operating permit to banks and also
regulates the operation of the banking
system.
It can therefore, persuade banks to follow
certain paths such as credit restraint or
expansion, increased savings mobilization
and promotion of exports through financialsupport, which otherwise they may not do,
on the basis of their risk/return
assessment.
8/13/2019 2 Monetary & Fiscal Policy
15/24
GLOBONOMICS & CONTEMPORARY MACRO ECONOMIC ISSUES
INFINITY BUSINESS SCHOOL
Exchange Rate
By selling or buying foreign exchange, the
Central Bank ensures that the exchange
rate is at levels that do not affect domestic
money supply in an undesired direction,
through the balance of payments and the
real exchange rate.
The real exchange rate when misalignedaffects the current account balance
because of its impact on external
competitiveness.
8/13/2019 2 Monetary & Fiscal Policy
16/24
GLOBONOMICS & CONTEMPORARY MACRO ECONOMIC ISSUES
INFINITY BUSINESS SCHOOL
Fiscal Policy
It refers to the Revenue and Expenditure
policy of the Govt.
Through changes in its expenditure and
taxes, the government attempts to increase
or decrease output and income and seeks
to stabilise the ups and downs in the
economy.
In the process, fiscal policy creates a surplus
(when total receipts exceed expenditure) ora budget deficit(when total expenditure
exceed receipts) rather than a balanced
budget (when expenditure equals receipts).
8/13/2019 2 Monetary & Fiscal Policy
17/24
GLOBONOMICS & CONTEMPORARY MACRO ECONOMIC ISSUES
INFINITY BUSINESS SCHOOL
Macroeconomic Goals
Economic Growth: By creating conditions for
increase in savings & investment
Employment: By encouraging the use of
labour-absorbing 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.
8/13/2019 2 Monetary & Fiscal Policy
18/24
GLOBONOMICS & CONTEMPORARY MACRO ECONOMIC ISSUES
INFINITY BUSINESS SCHOOL
Instruments of Fiscal Policy
Govt. Expenditure
Taxation
Govt. Borrowing
8/13/2019 2 Monetary & Fiscal Policy
19/24
GLOBONOMICS & CONTEMPORARY MACRO ECONOMIC ISSUES
INFINITY BUSINESS SCHOOL
Govt Expenditure
The expenditures of the government can
promote economic activity and create jobs.
For example, if the government funds a
project to build a high-speed train acrossthe country, the funds that go into the
project could go toward hiring workers
which could reduce unemployment and
inject money into the economy.
Higher levels of government spending tend
to promote employment and economic
growth.
8/13/2019 2 Monetary & Fiscal Policy
20/24
GLOBONOMICS & CONTEMPORARY MACRO ECONOMIC ISSUES
INFINITY BUSINESS SCHOOL
Taxation
When the government increases or
decreases taxes, it increases or decreases
the amount of money consumers have to
spend which can have a significant impact
on the direction of the overall economy.
Cutting taxes is a common fiscal policy
measure to encourage economic growth.
8/13/2019 2 Monetary & Fiscal Policy
21/24
8/13/2019 2 Monetary & Fiscal Policy
22/24
GLOBONOMICS & CONTEMPORARY MACRO ECONOMIC ISSUES
INFINITY BUSINESS SCHOOL
The Crowding-Out Effect
Fiscal policy may not affect the economy asstrongly as predicted by the multiplier.
An increase in government borrowingcauses the interest rate to rise.
A higher interest rate reduces investmentspending.
This reduction in demand that results whena fiscal expansion raises the interest rate is
called the crowding-out effect. The crowding-out effect tends to dampen
the effects of fiscal policy on aggregatedemand.
8/13/2019 2 Monetary & Fiscal Policy
23/24
GLOBONOMICS & CONTEMPORARY MACRO ECONOMIC ISSUES
INFINITY BUSINESS SCHOOL
Consideration
When the government increases its
purchases by $20 billion, the aggregate
demand for goods and services couldrise by more or less than $20 billion,
depending on whether the multiplier
effect or the crowding-out effect is
larger.
8/13/2019 2 Monetary & Fiscal Policy
24/24
GLOBONOMICS & CONTEMPORARY MACRO ECONOMIC ISSUES
INFINITY BUSINESS SCHOOL
Govt Borrowing
Method to mobilize savings of the
community for economic development.
Public borrowing becomes necessarybecause taxation alone cannot provide
sufficient funds for economic
development.
Besides, too heavy taxation has anadverse effect on private saving and
investment.
Recommended