Monetary Policy Bcom Notes

Monetary Policy Bcom Notes:- In this post, you will get the notes of B.com 3rd year money and financial system, by reading this post you can score well in the exam, hope that this post has helped you with this post to all your friends and all groups right now I must share it so that every student can read this post and it can also be helped in this post. Monetary Policy Bcom Notes

MONETARY POLICY

Meaning of Monetary policy

Monetary policy refers to the policy of the Government pertaining to the monetary matters in the economic system. Monetary policy is carried out by the central bank of a country.

Monetary policy is a policy which employs central bank’s control over the supply and cost of money as an instrument for achieving certain given objectives of economic policy.

Prof. Harry G.Johnson has defined monetary policy as a “policy of employing the central bank’s control on the supply of money as an instrument for achieving the objectives of general economic policy.” According to Raymond P. kent, “Monetary Policy is the management of expansion and contraction of the volume of money in circulation for the explicit purpose of attaining a specific objective.”

According to Wrightsman, “Monetary policy is the delibrate effort by the central bank to control the money supply and credit creation for the puropse of achieving certain broad objectives.”

In simple words, the policy followed by a centi al bank to control credit is known as monetary policy. It plays a crucial role in moulding the economic character of a company because money and credit in a modern economy exercise a vital influence upon the course, nature and volume of economic activities. In India, monetary policy is carried out by the Reserve Bank of India.

In the Indian context monetary policy comprises those decisions of the government and the Reserve Bank of India which directly influence the volume and composition of money supply, the size and distribution of credit, the level and structure of interest rates and the direct and indirect effects of these monetary variables upon related factors such as savings and investment and determination of output, income and price.

Objectives of Monetary Policy

Monetary policy, in essence, is the economic policy of the government in the monetary field. Thus, the objectives of monetary policy must be regarded as being part of the overall economic objectives to be pursued by the government. An appropriately conceived monetary policy can significantly assist in economic growth by adjusting the money supply to the needs of growth by directing the flow of funds into the desired channels. Monetary policy should be directed to achieve different objectives, depending on the environment and the time factor. The general accepted important objectives of monetary policy may be summarised as follows:

Stability of Domestic prices and Control of Trade Cycles: The maintenance of the stability of the internal value of currency was considered main objective of monetary policy, so long as the gold standard existed. After the suspension of gold standard, importance was given to control of credit with the objective of stabilising price level and the business cycles. The fluctuations in price level are always accompanied by fluctuations in the level. of business activity. When the objective of the monetary policy is to encourage the maintenance of full employment and to encourage economic growth, it should also aim to gently raising prices which would further encourage production. Rising and falling of prices are dangerous hence stability in the prices is necessary.

The stability of prices does not mean constant prices, but rising prices with little variations. Individual prices may be allowed to fluctuate on account of changes in the source of raw materials, improvement in the techniques of production, introduction of new products etc. Money acts as measure of value and its value must be stable. the internal stability of the currency become an important objective of the monetary policy in recent years.

Full Employment: The another objective of the monetary policy is to achieve full employment of the available factors to produce maximum output. Some economists felt that full employment is essentially static and short-run. According to C. R. Whittlesey, “The full employment objective looks towards optimising the current utilisation of the capacity. In other words, ideal output under the full employment objective is the country’s economic potential at the prevailing level of technology.” Further, Dr. V. K. R. V. Rao explained the full employment concept. According to him, “Full employment means increasing the number of to maximum conistent with existing employment opportunities and this is to be brought about by increasing effective demand to the limit, beyond which it will result in inflation.” Full employment can be an objective mainly in the developed countries. The objective of monetary policy in underdeveloped countries is to achieve economic growth.
Economic Growth: Monetary policy plays an important role in the economic growth of a country. The policy of the central bank in economic growth is significant in the development process. Monetary policy is an integral part of economic policy which is capable of influencing various economic activities in the country.

Monetary policy in underdeveloped countries is also expected:

(a) to maintain a continuously low structure of interest rates;

(b) to encourage the community to save:

(d) to help in establishment and development of term-financing institutions; and

(e) to provide credit at differential interest rates to economically weaker sections of the community.

Neutrality of Money: Money first started serving simply as a means of exchange. The policy of neutral money seeks to do away the disturbing effects of the changes in its quantity on prices. Money should be a passive factor having only one function i.e., to facilitate exchange. In other words, it should be neutral in its effects. Inflation and deflation occur only because of non-neutral policy. Neutral money does not mean absolutely fixed quantity of money. It means keeping effective supply of money constant. The effective supply of money takes into consideration both quantity of money and the velocity of circulations of money.
Stable Exchange Rates: Another important objective of monetary policy is maintaining the stability in the external value of the currency. Stable exchange rate is regarded as an essential condition for the promotion of smooth international trade. Fluctuations in exchange rates might lead to lack of confidence in a particular currency. It would lead to speculation in the foreign exchange market. Stable exchange rates are the best guarantee for maximum economic and social welfare of countries. It is possible to maintain both internal and external stability in the value of a currency through an efficient monetary management.

Limitations and Drawbacks of Monetary Policy

Monetary Policy has its unique role and significance in a development or a developing country. But it can not be the be-all and end-all of the system. In view of its scope and operational aspect, various limitations of the monetary policy may be stated as under.

Existence of Non-monetised Sector: Changes in bank rate or other monetary instruments are proved to be ineffective in underdeveloped countries also on account of the existence of a vast non-monetised sector in their economies.
Lack of Banking Habits: In most of the under-developed nations, money supply primarily consists of currency in circulation while bank deposits form relatively a small proportion of it. Lack of banking habits on the part of the people in poor countries makes it difficult for the monetary authority to influence the economy by controlling the banking system.
Unorganised Money Market: The money market is unorganised in a underdeveloped country, and therefore, the monetary management of the Central Bank cannot be perfect.
No Direct Influence on Strategic Growth Variables: Monetary policy basically deals with the monetary factors like money supply, credit rate of interest, etc. But it cannot directly affect the rate of profit, investment function, savings, capital formation etc. which are strategic growth variables.
Inadequate Growth of Banking System: Success or failure of monetary policy very much depends on the degrees of development of the banking system, its organisation, co-ordination and integrated network in the country as a whole. Due to lack of all this system, monetary policy does not work effectively in the under-developed countries.
Conflicting Objectives: When two or more objectives are of a conflicting nature, the monetary authorities have to reconcile them and while doing so a particular goal may not be persued, price stability is to be sacrificed to some extent.
Not Effective in Overcoming Depression: It is generally conceived that monetary policy is more effective in checking economic activity than in stimulating it. In other words, monetary policy is more effective in checking boom conditions than in generating recovery from recession or depression. In times of depression, the monetary policy can do little.

Inspite of above limitations, the monetary policy has to play a vital role in developing the economy from a stage of primary backwardness to a stage of self-sustained growth. However, the monetary policies and measures of developed countries are not always readily applicable as solutions to the typical problems facing newly-developing countries.

Monetary Policy Bcom Notes