Economic Policies- Monetary and Fiscal

In: Business and Management

Submitted By navyamukhi
Words 481
Pages 2
MONETARY POLICY

WHAT IS MONETARY POLICY?
 Policy to control the supply of money in the country  Targeting a rate of interest to attain objective of growth and stability of the economy.

TYPES OF MONETARY POLICIES
Expansionary
• Increases the total supply of the money in the economy • Used to combat unemployment in a recession by lowering interest rates

TYPES OF MONETARY POLICIES
Contractionary
• Decreases the total supply of the money in the economy • Used to combat inflation by raising interest rates

TOOLS OF MONETARY POLICY IN INDIA

Cash Reserve Ratio (CRR) Statutory Liquidity Ratio (SLR) Repo and Reverse Repo Rate

CASH RESERVE RATIO (CRR)
• Cash Reserve Ratio (CRR) is a specified minimum fraction of the total deposits of customers, which commercial banks have to hold as reserves either in cash or as deposits with the central bank • RBI uses CRR either to drain excess liquidity or to release funds needed for the economy from time to time.

STATUTORY LIQUIDITY RATIO (SLR)
• SLR is the minimum percentage of deposits that the bank has to maintain in form of gold, cash or other approved securities.

REPO AND REVERSE REPO RATE
REPO RATE
• It is the rate at which the RBI lends shot-term money to the banks. When the repo rate increases borrowing from RBI becomes more expensive.

REVERSE REPO RATE
• It is the rate at which banks park their short-term excess liquidity with the RBI. The RBI uses this tool when it feels there is too much money floating in the banking system.

PURPOSE OF REPO AND REVERSE REPO RATE
• Repo rate and reverse repo are an important tool used by the RBI to control the supply of money in the banking system • In case of high inflation, RBI increases the repo rate and thus the cost of borrowing funds become dear.

• By reducing the Repo rate RBI can reduce the cost of borrowing and there by the interest…...

Similar Documents

Monetary and Fiscal Policies

...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.[1][2] The official goals usually include relatively stable prices and low unemployment. Monetary theory provides insight into how to craft optimal monetary policy. It is referred to as either being expansionary or concretionary, where an expansionary policy increases the total supply of money in the economy more rapidly than usual, and contractionary policy expands the money supply more slowly than usual or even shrinks it. Expansionary policy is traditionally used to try to combat unemployment in a recession by lowering interest rates in the hope that easy credit will entice businesses into expanding. Contractionary policy is intended to slow inflation in hopes of avoiding the resulting distortions and deterioration of asset values. Monetary policy differs from fiscal policy, which refers to taxation, government spending, and associated borrowing.[3] Overview Monetary policy rests on the relationship between the rates of interest in an economy, that is, the price at which money can be borrowed, and the total supply of money. Monetary policy uses a variety of tools to control one or both of these, to influence outcomes like economic growth, inflation, exchange rates with other currencies and unemployment. Where currency is under a monopoly of......

Words: 6429 - Pages: 26

Identification of the Mexican Monetary Policy and the Fiscal and Monetary Indicators

...To identify the fiscal and monetary policy tools used by Mexican Presidents since Miguel Aleman and Make clear the fiscal and monetary indicators that define each policy the economic models of that time must be examined; from Miguel Aleman to Felipe Calderon there has been just 3 Economic Models: a) 1940-1964: Import substitution model. (Modelo de sustitución de importaciones) b) 1964-1982: Stabilizing development model. (Modelo de desarrollo estabilizador) c) 1982- ………: Neoliberal model. (Modelo neoliberal) in order to understand this models and its implications it’s important to make sure a clear understanding about the policies. The Macroeconomic policy affects a country or region as a whole. It deals with the monetary, fiscal, trade and exchange regime, as well as economic growth, inflation and national rates of employment and unemployment. Changes in demand and aggregate supply can cause short-term fluctuations in output and employment. The monetary and fiscal policy can shift aggregate demand and, therefore, influence these fluctuations. a) 1940-1964: Import substitution model, presidents on it: Manuel Ávila Camacho, Miguel Alemán Valdez, and Adolfo Ruiz Cortines. In the import substitution model, the management of public finances, which sought to redistribute income and promote domestic production, contributed to the process of industrialization and modernization in Latin America. Fiscal functions got away from their initial orientation because......

Words: 1273 - Pages: 6

Fiscal and Monetary Policy

...The Fiscal and Monetary Policy and Economic Fluctuations XXXXXXXX Strayer University Principles of Economics, ECO100 Professor XXXX XXXXXXXX August 24, 2013 The U.S. Economic Situation: A 5 Year Comparison Compared to five years ago, the U.S. economic situation has improved. The real gross domestic product (GDP), a macroeconomic measurement used to “summarize the total production of [the] entire economy” (O’Sullivan, Sheffrin, & Perez, 2012), has shown positive growth since the bottom point of the recent recession that occurred in 2009. (See graph in Figure 1.) In fact, by 2012, growth in the U.S. GDP surpassed that of the 2007 pre-recession point. Conversely, the key economic indicators of interest rates, inflation, and unemployment were examined for the same time period, from 2007 to 2013, in an attempt to discover possible correlations between them. First, U.S. government security interest rates published by the U.S. Treasury reflect a steady reduction since the height of the recession in 2009. Specifically, in 2007, the average annual rate was 2.34 percent and in 2012 it was .017; a 99 percent decrease of 2.323 percent over this five year period. (See graph and table in Figure 2.) It is most important to reiterate that the vast majority of the reduction in government security interest rates occurred between 2009 and 2012, reflecting a correlation and possible Treasury reaction to the 2009 recession that is indicated in the previously discussed U...

Words: 1900 - Pages: 8

Fiscal and Monetary Policy

... 1st July 2013 For all employees of Royal Mail Group Joint Royal Mail, CWU, Unite Statement 1. Royal Mail Group, CWU and Unite are committed to placing equality, diversity and fairness at the heart of our values, policies and everyday practices of our employees. 2. Royal Mail Group, CWU and Unite are committed to creating and maintaining a working environment free from bullying and harassment, where everyone treats each other with dignity and respect, so people are able to achieve of their best. 3. In general terms, bullying and harassment refers to unwanted behaviours that make someone feel intimidated, degraded, humiliated or offended. It can be between two individuals or may involve groups of people and includes behaviour that employees may find offensive even if not directed at them personally. Bullying and harassment can occur in written communications, visual images, by phone, mail and social media as well as face to face actions. Inappropriate banter will not be tolerated. 4. Managing performance by giving feedback constructively, asking people to undertake their responsibilities or carry out another reasonable task, or taking appropriate action under the relevant employment policies is not bullying or harassment, but conversations about performance will be consistent with the general requirement that we all treat each other with dignity and respect. Behaviour which is not in accordance with these principles is......

Words: 6474 - Pages: 26

Fiscal and Monetary Policy

...Fiscal and Monetary Policy Governments can use both fiscal and monetary policies to move the economy from a recessionary or expansionary gap. Fiscal policies include increased or decreased government spending, increased or decreased taxation; on the other hand monetary policies include increased or decreased money supply, changes in interest rate, etc. One of the tools of fiscal policy is government spending, the initial equilibrium is represented by the point E. With increased government spending, the IS curve shifts to the right and new equilibrium is reached at point E’, with increased level of output and higher interest rate. Monetary policy can help the economy back to the long run equilibrium. Let the initial equilibrium point is E, with an increase in money supply, the LM curve shifts to the right and new equilibrium is reached at the E’ with a higher income level and lower interest rate (shown in the figure below). The major benefits of fiscal policy are: (i) Government spending can be directed to the areas like infrastructure, education, and housing. Announcement of fiscal policy can be implemented immediately. (ii) Fiscal policy can be used to discourage negative externalities, for example, “green” taxes can be used to discourage polluting activities. (iii) Fiscal policy is effective in times of recession as it provides the stimulus in the economy by increasing the aggregate demand in the economy. The major disadvantages of fiscal......

Words: 610 - Pages: 3

Fiscal and Monetary Policy

...Fiscal Vs. Monetary Policies In Fiscal Policy it involves the government changing tax rates and levels of government spending to influence aggregate demand in the economy. In simpler words, it’s the governments way to check over the nation’s economy to see if the tax rates and the spending is appropriate. The Fiscal Policy covers the policies of all the taxes and the spending. Fiscal Policy is close with the political philosophy such as justice, politics, and liberty. Obviously, the lower the tax rates the more people are able to spend. If all goes right the unemployment would be low, there would be low inflation, and a constantly growing economy would appear. In Monetary Policy it involves changing the interest rate and influencing the money supply. Monetary Policy is usually carried out by the Central Bank/Monetary authorities and involved setting base interest and influencing the supply of money. Similar to Fiscal Policy, Monetary Policy is run by the Central Bank that influences the money supply, which is the total money in the economy as a whole. The interest rates are based on what the economy can handle. For example, if the economy went into a recession then that would mean that the Central Bank would decrease the interest rates and vice versa. Since the Monetary Policy is run by the Central Bank, it cuts from having any political input. The whole point is to make our economy grow but at a constant rate, and these policies are able to do that by doing their part in...

Words: 294 - Pages: 2

Fiscal and Monetary Policy in European Market

...| Fiscal and Monetary policy of European Union | Macroeconomics Essay | | Fiscal and Monetary policy of European Union The decision to form an Economic and Monetary Union was taken by the European Council in the Dutch city of Maastricht in December 1991, and was later enshrined in the Treaty on European Union (the Maastricht Treaty). Economic and Monetary Union takes the EU one step further in its process of economic integration, which started in 1957 when it was founded. Economic integration brings the benefits of greater size, internal efficiency and robustness to the EU economy as a whole and to the economies of the individual Member States. This, in turn, offers opportunities for economic stability, higher growth and more employment – outcomes of direct benefit to EU citizens. In practical terms, EMU means: * Coordination of economic policy-making between Member States * Coordination of fiscal policies, notably through limits on government debt and deficit * An independent monetary policy run by the European Central Bank (ECB) * The single currency and the euro area The launch of the euro saw the creation of a two-tier Europe, but systemic defects led subsequently to the current crisis of the Eurozone, resulting in a much more complex and problematic set of core-periphery relations between north and south. The preeminent role of Germany in the north is pointing to the lack of democratic legitimacy in the whole construction. The idea of......

Words: 595 - Pages: 3

The Fiscal and Monetary Policy

...six years ago we had a huge economic crash, one comparable and the biggest since the Great Depression. That is a huge crash. What kind of economic status are we in now? Is the US finally recovering? I was in high school when the big crash happened so I didn’t feel too many effects from it but I surely feel the pain of the economy now.About five to six years ago interest rates were sky high and raising, inflation was huge and unemployment was also raising at a steady rate. The War on Terrorism was booming, the US was dumping a lot of money into the war. The political policies were changing because of the change in our president. The value of the dollar also fluctuates a lot. A lot of money was needed to fund the War on Terrorism, more money was printed for use which caused a fluctuation on the dollar and therefore created inflation. The general American people felt the financial burden of the war. Banks loaned out so much money and when people were failing to pay back the banks, the banks were failing. The US needed to bail out the US banks. With the US already in debt, all of these things just contributed to more debt and more issues with inflation, interest rates and unemployment. The US government had to save the banks. They created policies and bail out plans to help the banks from completely crashing. Many Americans feel that the government has done what they can to help the banks and the wealthy but not the poor. “The beneficiaries of these policies, in the public’s......

Words: 806 - Pages: 4

Monetary and Fiscal Policy

...|Monetary and Fiscal Policy | | | |Y O U D E C I D E | | | |4/8/2011 | | | F Khan | Solution: Before getting to the words that you need I would like to point out a few mistakes in the statements mentioned above. It attributes a statement to Raymond Burke that the President should lower interest rates further to help business: the President does not control short-term interest rates, it depends on what the Fed wants to do. The US economy is coming out of the most severe recession since the Great Depression and the economy needs as much support as it can possibly get. This will involve both monetary and fiscal policies. Investment in the economy has fallen by more than a quarter in the recession and an expansionary monetary policy that lowers interest rates will encourage firms to increase investment. It will also help increase consumption as......

Words: 424 - Pages: 2

Fiscal and Monetary Policy

...economy the key indicators include economic growth, inflation unemployment of the country. From these indicators economic growth which is measured by GDP is most important. Policy makers judge the economy by measuring these macroeconomic indicators. The performance of the economy is measured in terms of the achievement of its economic objectives. Policy makers develop fiscal and monetary policy to achieve these long term objectives of the economy. Fiscal Policy Fiscal policy is used to collect revenue for the government in terms of taxes. Main tools of fiscal policy are taxes and government spending. If government make any changes in tax structure and government spending it effect the aggregate demand and level of economic activity in the country. To stabilize the economy on a business cycle fiscal can be used. Fiscal policy is made under the law of a legislature. Making any changes in the fiscal policy tools it effects the level of activity and aggregate demand in the country, it also effect the savings and investment in the economy, and distribution of income. * Expansionary fiscal policy In expansionary fiscal policy government increases spending and decrease taxes. To correct the problem in business cycle transfer payments are increased. Expansionary fiscal policy is used to close the recessionary gap, to decrease unemployment and improve the economic condition during recession. * Restrictive fiscal policy In restrictive fiscal policy government increases......

Words: 2178 - Pages: 9

The Fiscal and Monetary Policy

...The Fiscal and Monetary Policy Lajeska Willingham Dr. Onipede Principles of Economics 08/24/2014 The role of government in the United States economy expand far beyond its activities as a manager of specific industries. The government also manages the overall measure of economic activity, seeking to provide immense levels of employment and substantial prices with two main tools for achieving these objectives: fiscal policy, through which it regulates the applicable level of taxes and spending; and monetary policy, through which it manages the supply of money. Discuss the current economic situation in the U.S. as compared to five (5) years ago. Include interest rates, inflation and unemployment rate in your explanation. Interest rates started out in January 2009 at 3.8% and by the end of the year in December 2009 the interest rates had been cut down to 3.2%. According to the daily treasury, interest rates are now at 3.16% which is a decrease from 3.92% from the beginning of the year. The buying power of the dollar has increased over the past years according to the consumer price index. If an item was purchased in 2009 at $20.00 that same item would cost $22.21 today which is at an inflation rate of 11.1%. The current economic situation in the United States is unemployment is still above its natural rate. The economy has continued to grow since the recession but, at a slower rate than what society would like to see. According to Time Business &...

Words: 1306 - Pages: 6

The Fiscal and Monetary Policy and Economic Fluctuation

... U.S. Economic Situation When it comes to explaining The Fiscal and Monetary Policy and Economic Fluctuations, there are many variables to take into account. Looking at how the United States has been on this long recovery since the recession starting in 2007 all the way up to this point, the economic situation has gone from bad to ok. In discussing the economic situation as opposed to 5 years ago, one could truly argue that even though the situation was not the best to say the least, the United States is looking better and better when it comes to the economy. In October 2009 the unemployment rate in America was 10 percent, or that was the peak of it. It had not been that bad in America since late 1982, early 1983. In July 2009 the number of job openings declined to a series low of 2.1 million, unemployment reached a recent low of 129 million in February 2010. By 2012 it had increased to over 132 million and seemed to be rising, little did anyone know that things would soon take a turn for the better. Economists were predicting outrageous numbers for the next few years before things would even begin to get better, and they too were wrong in that prediction. Business cycles differ from economic fluctuations. As much as some market observers would prefer, economic fluctuation is a fact of life. Economic fluctuations are generated by shifts in specific economic data that affect limited facets of the economic picture. ......

Words: 1056 - Pages: 5

Fiscal and Monetary Policies

...Fiscal and Monetary Policies Name University ECON CL # Professor Name Date Submitted Fiscal and Monetary Policies American great depression made policymakers come up with some drastic actions to counteract it. The policy makers are adopted and implemented various monetary and fiscal policies to reduce the effect of the depression. As a counteractive measure, economic decisions makers increased government spending and cut taxes while financial policy makers opted for quantitative easing that is a move by the central bank to introduce new money into the money supply (Blinder, Zandi, & Moody's Economy.com, 2010). There has been a raging debate on the issues surrounding the action taken by the federal government but to understand better the effects it is prudent first to know the reason behind the decision and the roles of both national and fiscal policies. In the past, around 1930s classical economist held that the economic downturn can only correct itself and doesn’t need intervention from government. American great depression made many economist and policy makers to give a second thought to classical economist by seeing a need for policy intervention (Blinder, Zandi, & Moody's Economy.com, 2010). Since then monetary and fiscal policies have remained the key intervention measures to correct economic downturns. When monetary and fiscal policies applied resulted in maximum employment growth and stable inflation. Both of......

Words: 952 - Pages: 4

Fiscal Monetary Policies

...Question 1 Introduction In economics there are two main schools of thought; these schools differ in their belief of what policies are best suited to attain full employment in the economy. Keynesians tend to favour demand side policies and are more prone to intervene in the market and therefore prefer to use fiscal policy whilst monetarists believe adjustments in money supply is more appropriate in stabilising the market ,therefore preferring monetary policy.  In this question I will discuss the views of Keynesians and monetarists regarding the effectiveness of monetary and fiscal policies in controlling aggregate demand through the IS-LM framework.   I will first provide a brief description of the curves explaining their formation and what they represent and then I will go on to examine monetary and fiscal policy within the   IS-LM framework. Finally, I will examine the views of monetarist and Keynesians regarding the effectiveness of both policies in raising the level of national l income and also consider the extreme cases. The IS-LM model was initially developed by John Hicks in 1937 but was made popular in 1949 by Hansen in order ‘to provide a framework for analysing the factors determining the level of aggregate demand’.   The IS-LM model is a short run model of the determination of output. It shows the unique combination of income and interest rates that lead to an equilibrium in both the goods and money market at the same time (Begg, 2008). The IS-LM model is......

Words: 1998 - Pages: 8

Fiscal and Monetary Policy

...Fiscal and Monetary Policy The textbook states clearly that the aggregate supply curve (and the economy in general) is heavily influenced by unemployment: “The Keynesian range of the curve is horizontal because neither the price level nor production costs will increase or decrease when there is substantial unemployment in the economy.” (Tucker) This shows that high unemployment should be prevented as much as possible, and quickly alleviated if it begins to rise. “Our Fiscal Policy Paradox”, written by Alan S. Blinder, explores the current fiscal and monetary policy options, and describes which options should be implemented in order to pull the economy out of the recession. The fiscal options that are given are: 1. New jobs tax credit 2. Government hiring 3. Cut sales taxes The tax credit for new jobs would simply be an incentive for employers to hire more people in order to decrease unemployment, which will increase spending in general, a key factor in pulling the nation out of its economic trough. This strategy has been pursued, but not effectively. The author explains: The government could offer tax breaks to firms that increase their employment above some base level. In fact, Congress did just that with the HIRE (Hiring Incentives to Restore Employment) Act in March. But it was legislated on a pitifully small scale and will expire at year's end. We need a larger version that stays around for a while. (WSJ.com) Providing such a credit would......

Words: 826 - Pages: 4