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LECTURE:9

Monetary policy

MONETARY POLICY
1. Introduction: Monetary policy is concerned with changing the supply of money stock and
rate of interes for the purpose of stabilising the economy at full-employment or potential ouptut
level by influencing the level of aggregate demand. More specifically, at times of recession
monetary policy involves the adoption of some monetary tools which tend the increase the
money supply and lower interest rates so as to stimulate aggregate demand in the economy. On
the other hand, at times of inflation, monetary policy seeks to contract the aggregate spending by
tightening the mony supply or raising the rate of interest.
2. Tools of monetary policy:a. open market operations.b. changing the bank rate. c. changing
cash reserve ratio. d. selective credit control.
3. Differenciate between tight and easy monetary policy:

TIGHT MONETARY POLICY EASY MONETARY POLICY


1. Central bank sells securities through open Central bank buys securtities through open market
market operations. operations.

2. It raises cash reserve ratio and statutory liquidity It reduces cash reserve ratio.
ratio.
3. It raises bank rate It lowers bank rate
4. It raises maximum margin against holding Minimum margin for holding.
of stocks of goods
5. Money supply decreases Money suply increases
6. Interest rate rises Interest rate falls
7,. Investment expenditure declines Investement increases
8.Aggregate demand declines Aggregate demand increases
9. Price level falls Aggregate output increases by a multiple of the
increase in investment

4. Monetary policy in India: a. ensuring price stability. b. to encourage economic growth. c. to


ensure stability of exchange rate of the rupee.
5. Sub-periods: a. Monetary policy of controlled expansion 1951-1972. b Monetary policy in
the pre- reforms period 1972-1991. c. Monetary policy in the post-reforms period 1991-2000. d.
recent trend
Attachments:
IS- Acceler
ppf CB Impact of inflation
LM ator
Reference:Economic Environment of Business H. L. Ahuja pp-307-319

Prepared by MBA\MRS R.CHITRA[ASSISTANT PROFESSOR\TSBA004]


30/11/09