Indicators 5.
It aims to influence the special type of credit, or to divert bank advances into certain channels, or to discourage from lending for a certain purpose. Their reserves are reduced and they lend less. Content Guidelines 2. Price stability also impedes economic progress as there is no incentive left with the business community to increase production of qualitative goods. If due to excessive rise in price the real rate of interest becomes negative, people will have less incentive to save. If the fall in security prices is expected to be short-lived, the banks will prefer to keep securities rather than sell them at a capital loss. This will leave the level of income unaltered at OY0 which corresponds to the point of intersection of IS0 and LM2.
Credit performs important functions. A shortage of money supply will retard growth while an excess of it will lead to inflation. These policies are implemented through different tools, including the adjustment of the interest ratesInterest RateAn interest rate refers to the amount charged by a lender to a borrower for any form of debt given, generally expressed as a percentage of the principal., purchase or sale of government securities, and changing the amount of cash circulating in the economy. Government securities lying in the bank’s portfolios are substituted for loans.
10. Plagiarism Prevention 5. However, it has to be supported by proper credit rationing.
In such a situation, monetary policy has much to contribute to short-run price stability. There are a number of instruments of monetary policy, which are important for a business to understand, but, here it is also important to know what Monetary Policy is? Open market operations refer to sale and purchase of securities in the money market by the central bank. Contrariwise, investment is encouraged when the cost of production of new capital is less than its market value. Role in Promoting Faster Economic Growth 7. With money supply targeting, the policy stance of the RBI is quite transparent and performs a signaling function. As a consequence, there is general wave of prosperity and welfare in the community. Creation and Expansion of Financial Institutions: The primary aim of the monetary policy in a developing economy must be to improve its currency and credit system.
Monetary policy is used to coordinate the cost and price. Thus, the monetary policy having an objective of price stability tries to keep the value of money stable. Central banks use various tools to implement monetary policies. The low interest rate will encourage investment in new capital formation, inventories, construction activities, etc.
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