Monetory and Fiscal Policies

Topics: Monetary policy, Tax, Inflation Pages: 9 (2416 words) Published: December 18, 2011

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. The official goals usually include relatively stable prices and low unemployment. Monetary policy differs from fiscal policy, which refers to taxation, government spending, and associated borrowing FISCAL POLICY: 

 The Word “Fisc” means ‘state treasury’ so ‘Fiscal Policy’ refers to policy concerning the use of ‘state treasury’ or the Govt. Finances to achieve the macro economic goals. Fiscal Policy is defined as the govt. Programme of taxation, expenditure, & other financial operation to achieve national goals

The two main instruments of fiscal policy are government expenditure and taxation. Changes in the level and composition of taxation and government spending can impact the following variables in the economy: * Aggregate demand and the level of economic activity;

* The pattern of resource allocation;
* The distribution of income.
Two important tools of macroeconomic policy are Monetary Policy and Fiscal Policy. The Monetary Policy regulates the supply of money and the cost and availability of credit in the economy. It deals with both the lending and borrowing rates of interest for commercial banks. The Monetary Policy aims to maintain price stability, full employment and economic growth. The Reserve Bank of India is responsible for formulating and implementing Monetary Policy. It can increase or decrease the supply of currency as well as interest rate, carry out open market operations, control credit and vary the reserve requirements. The Monetary Policy is different from Fiscal Policy as the former brings about a change in the economy by changing money supply and interest rate, whereas fiscal policy is a broader tool with the government. The Fiscal Policy can be used to overcome recession and control inflation. It may be defined as a deliberate change in government revenue and expenditure to influence the level of national output and prices. For instance, at the time of recession the government can increase expenditures or cut taxes in order to generate demand. On the other hand, the government can reduce its expenditures or raise taxes during inflationary times. Fiscal policy aims at changing aggregate demand by suitable changes in government spending and taxes. The annual Union Budget showcases the government's Fiscal Policy. OBJECTIVES OF MONETARY POLICY:

* Maximum feasible output.
* High rate of growth.
* Growth in employment & income
* Price stability.
* Stability of Forex & national currency
* Inflation Control
* Greater equality in the distribution of income and wealth. Healthy balance in balance of payments (BOP)
1. Bank Rate
Bank rate is the minimum rate at which the central bank provides loans to the commercial banks. It is also called the discount rate. Usually, an increase in bank rate results in commercial banks increasing their lending rates. Changes in bank rate affect credit creation by banks through altering the cost of credit. 2. Cash Reserve Ratio

All commercial banks are required to keep a certain amount of its deposits in cash with RBI. This percentage is called the cash reserve ratio. The current CRR requirement is 8 per cent. 3. Inflation

Inflation refers to a persistent rise in prices. Simply put, it is a situation of too much money and too few goods. Thus, due to scarcity of goods and the presence of many buyers, the prices are pushed up. The converse of inflation, that is, deflation, is the persistent falling of prices. RBI can reduce the supply of money or increase interest rates to reduce inflation. 4. Money Supply (M3)

This refers to the total volume of money circulating in the economy, and...
Continue Reading

Please join StudyMode to read the full document

You May Also Find These Documents Helpful

  • Essay about fiscal policy
  • Fiscal Policy Essay
  • Fiscal Policy Essay
  • Fiscal Policy Essay
  • Essay about Fiscal Policy
  • Fiscal Policy Essay
  • Fiscal Policy Essay

Become a StudyMode Member

Sign Up - It's Free