Unit 7

Macro Economic Policy

Monetary Policy

• Monetary policy refer to those policy measures which monetary authority of a country (Central Bank)adop to control and regulate the volume of currency and credit in a country.

• Monetary policy can broadly defined as" the deliberate effort by the central bank to influence economic activity by variation in money supply, in availability of credit or in the interest rates consistence with specific national objective.”

Goal of Monetary Policy

• After the proceeding we can now enumerator the different goal of monetary policy from a more historic view point.

I. Price Stability-

II. Exchange Stability-

III. Full Employment and Maximum Output-

IV. High Rate of Growth-

Tools of monetary policy

• Reserve bank of India CAN USE VARIOUS METHOD to check the money supply in the economy. These can be divided into general/quantitative tools and specific /qualitative tools

The quantitative tools

Legal reserve ratio

open market operation

bank rate

The specific /qualitative tools

• Margin requirements

• Direct action

• Moral suasion

• Regulation of consumer

Fiscal Policy

Fiscal Policy-Meaning

• The word fisc means ‘state treasury’ and fiscal policy refers to policy concerning the use of ‘state treasury’ or the govt. finances to achieve the macroeconomic goals.

• “any decision to change the level, composition or timing of govt. expenditure or to vary the burden ,the structure or frequency of the tax payment is fiscal policy.”

- G.K. G.K. ShawShaw

Objectives of Fiscal Policy

• It has 2 major objectives:i. GENERAL obj-. aimed at achieving

macroeconomic goals

ii. SPECIFIC obj-. relating to any typical problems of an economy

Fiscal Policy And Macroeconomic Goals

• Economic Growth: By creating conditions for increase in savings & investment.

• Employment: By encouraging the use of labour-absorbing technology

• Stabilization: fight with depressionary trends and booming (overheating) indications in the economy

• Economic Equality: By reducing the income and wealth gaps between the rich and poor.

• Price stability: employed to contain inflationary and deflationary tendencies in the economy.

Instruments of Fiscal Policy

• Budgetary surplus and deficit

• Government expenditure

• Taxation- direct and indirect

• Public debt

• Deficit financing

Government Expenditure

It includes :

• Government spending on the purchase of goods & services.

• Payment of wages and salaries of government servants

• Public investment

• Transfer payments

Taxation

• Meaning : Non quid pro quo transfer of private income to public coffers by means of taxes.

• Classified into

1. Direct taxes- Corporate tax, Div. Distribution Tax, Personal Income Tax, Fringe Benefit taxes, Banking Cash Transaction Tax

2. Indirect taxes- Central Sales Tax, Customs, Service Tax, excise duty.

Public debt

• Internal borrowings 1. Borrowings from the public by means of treasury bills

and govt. bonds2. Borrowings from the central bank (monetized deficit

financing) • External borrowings 1. foreign investments2. international organizations like World Bank &

IMF3. market borrowings