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MEANING
Monetary policy is an instrument which effect the credit flow in an economy. The variation effect the demand & supply of credit in an economy, and the level or nature of economic activities.

Objective
Stability in price level Economic development Arrangement of full employment Expansion of credit facility Equality & Justice Stability in exchange rate

INSTRUMENTS
GENERAL (QUANTITATIVE) Methods SELECTIVE (QUALITATIVE) Methods

GENERAL (QUANTITATIVE) Methods

Meaning: These methods help in credit control in the economy. Affect total quantity of the credit.

Types
A. Bank rate policy B. Open market policy C. Cash reserve ratio D. Statuary reserve ratio

Bank Rate policy

Traditional approach:- Bank rate means on which central bank discounts and rediscount the eligible bills. Todays approach:- Bank rate means the minimum rate on which central bank provides financial accommodation to commercial bank in the discharge of its function as the lender of the last resort.

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

Open Market operation

Its include the sales and purchase by the central bank of . Assets Foreign exchange Gold Government securities Company securities

Use of Open Market operation

In the inflationary situation Central bank decrease the money supply. Central bank sale out the securities to commercial bank and control money supply. In the depressionary situation Central bank increase the money supply. Central bank purchase the securities from the commercial bank.

Cash Reserve Ratio

Commercial bank has to keep a certain percentage of his deposits with central bank. It control the cash flow in economy. It keeps changes in monetary policy framed by central bank of a country.

STATUARY LIQUIDITY RATIO

Commercial bank is to keep a certain percentage of his deposit as liquid asset. It control the cash flow in economy. It keeps changes in monetary policy framed by central bank of a country.

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

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

Function of credit regulation the quantitative methods

For expansion of credit For contraction of credit

Reduce the bank rate Purchase of securities Reduce the C.R.R. Reduce the S.L.R.

Increase the bank rate sales of securities Increase the C.R.R. Increase the S.L.R.

Specific or qualitative Credit Control

Adopt for expansion and contraction of credit to attain specific objective.

Methods of qualitative credit control

Credit rationing Change in margin Direct action

MEANING
Measures related to taxation & public expenditure are normally called fiscal measures and the policy concerning them as known as FISCAL POLICY. In short, fiscal policy or budgetary policy consists of steps & measures which the government in order to fulfill the aims of economic policy.

Objective of fiscal policy

To achieve and maintain the full employment in the economy. Attain Economic growth in long term. Achieve economic stability. To guide the allocation of existing resources into socially necessary lines of development.

INSTRUMENTS
PUBLIC EXPENDITURE TAXATION PUBLIC DEBT

PUBLIC EXPENDITURE
Meaning: Government spending Productive Non-Productive

Types
PUMP PRIMING The government spending which will have the effect of setting the economy going on the way towards full utilization of resources. Example:- Gov Expenditure, building infrastructure etc. COMPENSATORY SPENDING 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.

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

Types of Tax
Direct Tax Direct tax are those tax which a person pay to government directly for himself and can not enforce on other. For example:- income tax, wealth tax etc. Indirect tax Indirect tax are those tax which a person can on others. For example:- service tax, sales tax.

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. Deficit financing = Gov. exp. Gov. revenue. Government take the public debt to fulfill the gap between the Gov exp and the revenue.

Types of public debt

Borrowing from public Borrowing from commercial bank Issue of new currency

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.

Some facts and figures

Monetary policy is been framed by Fiscal policy is been framed by Present governor of R.B.I Present Finance minister of India. Current S.L.R. Current C.R.R.. Monetary policy in India framed under which act.