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KARPAGAM ACADEMY OF HIGHER EDUCATION, COIMBATOREClass: I MBA Course Name: Managerial Economics
Course Code: 21MBAP103 Unit V Semester: I Year: 2021-23 Batch
Government in macro economy
SYLLABUS
Monetary policy - Objectives of Monetary policy – Objectives of monetary policy – Types of
monetary policy – Instruments of monetary policy Fiscal policy- Objectives of fiscal policy - Types
of fiscal policy – Instruments of fiscal policy - Budget preparation – Deficit budget - Balance of
trade and Balance of payments - Components of BOP - Disequilibrium in BOP – Types- causes and
measures to correct disequilibrium Meaning and functions of money - Demand and supply of
money
Monetary Policy
Monetary policy implies those measures designed to ensure an efficient operation of the economic
system or set of specific objectives through its influence on the supply, cost and availability of
money. The concept of monetary policy has been defined in a different manner according to
different economists;
Definition of Monetary Policy
Many economists have given various definitions of monetary policy. Some prominent definitions are
as follows.
According to Prof. Harry Johnson,
"A policy employing the central banks control of the supply of money as an instrument for
achieving the objectives of general economic policy is a monetary policy."
According to A.G. Hart,
"A policy which influences the public stock of money substitute of public demand for such
assets of both that is policy which influences public liquidity position is known as a monetary
policy."
Prepared by C.Sagunthala, Assistant Professor, Dept of Management, KAHE, Page 1/103
, KARPAGAM ACADEMY OF HIGHER EDUCATION, COIMBATORE
Class: I MBA Course Name: Managerial Economics
Course Code: 21MBAP103 Unit V Semester: I Year: 2021-23 Batch
Objectives of Monetary Policy
The objectives of a monetary policy in India are similar to the objectives of its five year plans. In a
nutshell, planning in India aims at growth, stability and social justice. After the Keynesian revolution
in economics, many people accepted significance of monetary policy in attaining following
objectives.
Rapid Economic Growth
Price Stability
Exchange Rate Stability
Balance of Payments (BOP) Equilibrium
Full Employment
Neutrality of Money
Equal Income Distribution
These are the general objectives which every central bank of a nation tries to attain by employing
certain tools (Instruments) of a monetary policy. In India, the RBI has always aimed at the controlled
expansion of bank credit and money supply, with special attention to the seasonal needs of a credit.
Rapid Economic Growth: It is the most important objective of a monetary policy. The monetary
policy can influence economic growth by controlling real interest rate and its resultant impact
on the investment. If the RBI opts for a cheap or easy credit policy by reducing interest rates, the
investment level in the economy can be encouraged. This increased investment can speed up
economic growth. Faster economic growth is possible if the monetary policy succeeds in
maintaining income and price stability.
Prepared by C.Sagunthala, Assistant Professor, Dept of Management, KAHE, Page 2/103
, KARPAGAM ACADEMY OF HIGHER EDUCATION, COIMBATORE
Class: I MBA Course Name: Managerial Economics
Course Code: 21MBAP103 Unit V Semester: I Year: 2021-23 Batch
Price Stability: All the economics suffer from inflation and deflation. It can also be called as Price
Instability. Both inflation and deflation are harmful to the economy. Thus, the monetary policy
having an objective of price stability tries to keep the value of money stable. It helps in
reducing the income and wealth inequalities. When the economy suffers from recession the
monetary policy should be an 'easy money policy' but when there is inflationary situation there
should be a 'dear money policy'.
Exchange Rate Stability: Exchange rate is the price of a home currency expressed in terms of any
foreign currency. If this exchange rate is very volatile leading to frequent ups and downs in the
exchange rate, the international community might lose confidence in our economy. The monetary
policy aims at maintaining the relative stability in the exchange rate. The RBI by altering the
foreign exchange reserves tries to influence the demand for foreign exchange and tries to
maintain the exchange rate stability.
Balance of Payments (BOP) Equilibrium: Many developing countries like India suffers from the
Disequilibrium in the BOP. The Reserve Bank of India through its monetary policy tries to maintain
equilibrium in the balance of payments. The BOP has two aspects i.e. the 'BOP Surplus' and the
'BOP Deficit'. The former reflects an excess money supply in the domestic economy, while the later
stands for stringency of money. If the monetary policy succeeds in maintaining monetary
equilibrium, then the BOP equilibrium can be achieved.
Full Employment: The concept of full employment was much discussed after Keynes's publication
of the "General Theory" in 1936. It refers to absence of involuntary unemployment. In simple words
'Full Employment' stands for a situation in which everybody who wants jobs get jobs. However it
does not mean that there is Zero unemployment. In that senses the full employment is never full.
Prepared by C.Sagunthala, Assistant Professor, Dept of Management, KAHE, Page 3/103
, KARPAGAM ACADEMY OF HIGHER EDUCATION, COIMBATORE
Class: I MBA Course Name: Managerial Economics
Course Code: 21MBAP103 Unit V Semester: I Year: 2021-23 Batch
Monetary policy can be used for achieving full employment. If the monetary policy is
expansionary then credit supply can be encouraged. It could help in creating more jobs in
different sector of the economy.
Neutrality of Money: Economist such as Wicksted, Robertson have always considered money as a
passive factor. According to them, money should play only a role of medium of exchange and not
more than that. Therefore, the monetary policy should regulate the supply of money. The change in
money supply creates monetary disequilibrium. Thus monetary policy has to regulate the supply of
money and neutralize the effect of money expansion. However this objective of a monetary policy is
always criticized on the ground that if money supply is kept constant then it would be difficult to
attain price stability.
Equal Income Distribution: Many economists used to justify the role of the fiscal policy is
maintaining economic equality. However in recent years economists have given the opinion that the
monetary policy can help and play a supplementary role in attainting an economic equality.
Monetary policy can make special provisions for the neglect supply such as agriculture, small-scale
industries, village industries, etc. and provide them with cheaper credit for longer term. This can
prove fruitful for these sectors to come up. Thus in recent period, monetary policy can help in
reducing economic inequalities among different sections of society.
Role of Monetary Policy in developing economy
The monetary policy in a developing economy will have to be quite different from that of a
developed economy mainly due to different economic conditions and requirements of the two types
of economies.
Prepared by C.Sagunthala, Assistant Professor, Dept of Management, KAHE, Page 4/103
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