Case – Prof. Tom and Monetary Policy:

Topics: Monetary policy, Central bank, Inflation Pages: 4 (1332 words) Published: April 3, 2011
Q: What is meant by interest rate and monetary policy?
Ans: Interest Rate- Interest rate is cost of money. This is the rate which is charged by the lender on borrower for lending some money to him for a period of time. Interest rate is price of the money paid by the borrower for using the money of lender for a period of time. Monetary policy: monetary policy is a “policy employing the central bank’s control of the supply of money as an instrument for achieving the objective of general economic policy.” By using monetary policy Government controls the supply of money and flow of credit in to the economy. Monetary policy is exercised by the govt. with a view to long run price stability at maximum feasible output, a high rate of growth; greater equality and healthy balance of payments are also promoted to the maximum extent. Q: The role of the Reserve Bank of India in the matter of Interest Rate and Monetary policy? Ans. Reserve Bank of India is the key organization who uses these tools (interest rate and monetary policy) to regulate the money supply in the economy. The RBI exercise these options to stabilize the currency of the country and to control the supply of the money in the market which in turn strengthens the economy. Interest rates can’t move on their own as they affect the amount of investment which takes place in the economy. Increased interest rate reduces the investment and thus results in the decreased employment which in turn can result in depression and if interest rates fall it results in increased supply of the money in the economy which increases the purchasing power of everyone. This can cause inflation in the economy. So to control this adverse situation RBI uses monetary policy tools to stabilize it. Q: What is the relation between interest rate and demand?

Ans.: Interest rates play a major role in determining the level of demand in the economy. If the...
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