Monetary policy is the process by which the monetary authority of a country controls the supply of money, often targeting the purpose of promoting economic growth and stability.

Main targets: 1) stabilizing prices 2) low

unemployment Monetary authority of a country

controls (i) the supply of money, (ii) availability of money, and (iii) cost of money or rate of

interest to attain a set of objectives

oriented towards the growth and stability of the economy

Expansionary policy increases the total supply of money in the economy more rapidly than usual.

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 expands the money supply more slowly than usual or even shrinks it.

Contractionary policy is intended to slow inflation in order to avoid the resulting distortions and deterioration of asset values.

Gross National Product (GNP) = C + I + G + X

Where: C = Private Consumption expenditure I = Private Investment Expenditure

G = Government Expenditure X = Net Exports

C, I, X can be influenced by the monetary policy which can also influence the private consumption and investment spending and exports and imports.

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.

Monetary Policy: Target Market Variable:

Inflation Targeting Interest rate on overnight debt

Price Level Targeting Interest rate on overnight debt

Monetary Aggregates The growth in money supply

Fixed Exchange Rate The spot price of the currency

Gold Standard The spot price of gold

Mixed Policy Usually interest rates

In India, the central monetary authority is the Reserve Bank of India (RBI) is so designed as to maintain the price stability in the economy.

Other objectives: (i) Price Stability (ii) Controlled Expansion Of

Bank Credit (iii) Restriction of Inventories,

etc.,

CRR (Cash Reserve Ratio): fraction of deposits that banks must keep with RBI

SLR (Statutory Liquidity Ratio): It is the amount that the commercial banks require to maintain in the form of gold or govt. approved securities before providing credit to the customers

• To ensure solvency of the banks • A reduction of SLR rates looks eminent to

support credit growth in India

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Bank rate: It is the rate at which the Reserve Bank of India lends to commercial banks and other financial institutions for meeting shortfalls in their reserve requirements, for long-term purposes.

Repo rate: Banks borrow money from RBI on repo rate

Reverse Repo rate: RBI accepts banks surplus at reverse repo rates

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• Quantitative Policy volume of money in

circulation 1. Reserve Ratio 2. Open Market operation 3. Bank Rate

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Qualitative Policy :where this money

must go E.g.: Agricultural SectorsMoral Suasion : when money should not be

given to certain areas

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DIFFERENCE BETWEEN MONETARY POLICY AND FISCAL POLICY