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Money and banking ppt

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Money and banking ppt

  1. 1. WELCOME
  3. 3. Monetary and Fiscal Policies *Monetary Policy: Monetary policy refers to the credit control measures adopted by the central bank of a country. Monetary policy is the macroeconomic policy laid down by the central bank. It involves management of money supply and interest rate and is the demand side economic policy used by the government of a country to achieve macroeconomic objectives like inflation, consumption, growth and liquidity.
  4. 4. The main elements of monetary policy are: • It regulates stock and growth rate of money supply. • Its regulates the entire banking system of the economy. • It regulates the level an structure of interest rates directly in organized sector and indirectly in unorganized sector. • It determines the allocation of loans among different sectors
  5. 5. Objectives or Goals of Monetary Policy: The following are the principal objectives of monetary policy: • 1. Full Employment: Full employment has been ranked among the foremost objectives of monetary policy. It is an important goal not only because unemployment leads to wastage of potential output, but also because of the loss of social standing and self-respect. • 2. Price Stability: One of the policy objectives of monetary policy is to stabilize the price level. Both economists and laymen favor this policy because fluctuations in prices bring uncertainty and instability to the economy.
  6. 6. • 3. Economic Growth: One of the most important objectives of monetary policy in recent years has been the rapid economic growth of an economy. Economic growth is defined as “the process whereby the real per capita income of a country increases over a long period of time.” • 4. Balance of Payments: Another objective of monetary policy since the 1950s has been to maintain equilibrium in the balance of payments.
  7. 7. Fiscal policy The term fiscal policy refers to the expenditure and taxation policy of the government, which can influence economic activity by its expenditure program and imposing or lifting taxation on certain goods and services. Fiscal policy aims at raising financial resources through taxation and borrowing within the country and from abroad.
  8. 8. Objectives of Fiscal Policy: • Promotion of economic development and growth. • Mobilization of resources. • Reduction of inequalities of income. • Expansion of employment. • Price stability.
  9. 9. Business stabilization, full employment and monetary policy • Monetary policies use the level of the money supply and interest rates to influence the level of economic activity. The government may want to use its monetary policy to either boost economic activity or perhaps to reduce economic activity.
  10. 10. Help to reach Full Employment: Presume that an economy is suffering from unemployment because of deficiency of investment. The proper policy is to promote investment by - 1) The creation of additional money, 2) The creation of additional bank deposits, and 3) Greater velocity of circulation of money through activation of idle cash balances.
  11. 11. Stabilize the economy and the level of full employment: Once full employment is achieved, the problem of monetary policy is to maintain it by keeping the equality of planned investment and planned saving at full employment level. If planned investment is allowed to exceed planned saving beyond the stage of full employment, inflationary forces will tend to appear whereas, if planned investment is allowed to fall below planned savings, deflation will appear. Therefore, the obvious monetary policy should be to maintain the equality of planned saving and planned investment at the level of full employment.
  12. 12. Monetary policy and control of inflation: • Generally, the danger to full employment may come when planned investment is allowed to exceed planned saving, even after full employment has been achieved and there are no persons available to work. In such case, real output cannot increase, despite the increase in demand for goods and services.
  13. 13. Monetary Policy in a Less Developed Economy • Monetary policy was relegated to a secondary place, the primary place being given to fiscal policy. So if monetary policy plays only a secondary role in an advance country in maintaining full employment or in bringing about price stability, its role in a less developed country will naturally be still more limited. The money market itself may be dominated by an unorganized market which is outside the control of the central banks.
  14. 14. Inflation: • Inflation is the rate at which the general level of prices for goods and services is rising and, consequently, the purchasing power of currency is falling. Central banks attempt to limit inflation, and avoid deflation, in order to keep the economy running smoothly. • In general, inflation is a fall in the market value of purchasing power of money.
  15. 15. Fiscal policy in a less developed economy • The basic problem of an underdeveloped country is to ensure ec0nomic growth. The objectives of full employment is a distant dream of a developing economy. While the advance economy, is interested in preventing cyclical unemployment, the less developed economy is worried about chronic unemployment, disguised unemployment and underemployment.
  16. 16. Goals of monetary and fiscal policy: • Monetary and fiscal policies have common goals such as the achievement of ‘full employment’. To control inflation, the monetary policy aims at high interest rates and tight money conditions with the objectives of reducing investment and expenditure in general. • The fiscal policy aims at higher levels of taxation and lowering of public expenditure or a policy of surplus budgeting.
  17. 17. Difference between fiscal and monetary policy Monetary policy Fiscal policy • Monetary policy is the process by which the monetary authority of a country controls the supply of money, often targeting the rate of interest for the purpose of promoting economic growth and stability • Fiscal policy are those policies that influence the tax rates and government expenditure in the country.
  18. 18. THANK YOU