Economic Policies
Monetary Policy
A country's central bank can implement monetary policy as a collection of measures to manage the overall money supply and promote sustainable economic growth. Controlling the amount of money in an economy and the channels through which it is provided is known as monetary policy. A central bank seeks to affect macroeconomic variables such as inflation, the pace of consumption, economic growth, and general liquidity by controlling the money supply.
In addition to changing the interest rate, a central bank can control forex rates, purchase and sell government bonds, and vary the amount of cash that banks must hold in reserve.
Objectives of monetary policy:
Full employment
According to classical economists, full employment occurs when all the labor resources are being utilized as effectively as feasible. The pursuit of full employment has long been considered one of the monetary policy's top goals. It's because unemployment results in the loss of social position and self-respect, as well as the waste of potential output.
Price Stability
Stabilizing the price level is one of the monetary policy's primary goals.
Price stability, as evaluated by the Consumer Price Index over the medium term, is the state in which the local currency keeps its ability to buy goods and services (from 3 to 5 years). Price stability suggests that prices are growing at a moderate rate rather than not changing at all. Because price swings promote economic uncertainty and instability, economists endorse this policy.
Economic Growth
One of the most important objectives of monetary policy has been to maintain the economy's recent high rate of expansion. Economic growth, to put it simply, is the rise in economic measures like the GDP. Only economic growth cannot guarantee that residents of a country with rising GDP will have a high quality of life. Economic growth only complies with people's living standards.
Balance of Payment
Another goal of monetary policy since the 1950s is to maintain the balance of payments.
The Balance of Payments (BOP) is the statement of all transactions between domestic companies and the rest of the world during a given period(quarterly or yearly). It summarizes all transactions that domestic individuals, businesses, and governments enter into with foreign individuals, businesses, and governments.
Exchange Rate
The exchange rate is the price of your home currency expressed in foreign currency.
If the exchange rate is highly volatile and the exchange rate fluctuates frequently, the international community may lose confidence in the poor country's economy.
Monetary policy aims to maintain the relative stability of exchange rates.
Neutrality of Money
Economists like Wick stead Robertson have always viewed money as a passive factor.
In their opinion, money should serve as a medium of exchange and nothing more.
Monetary policy should therefore regulate the money supply. The neutrality theory of money theory argues that changes in the money supply affect the prices of goods, services, and wages, but not aggregate productivity.
Equal Income Distribution
Many economists have justified the role of fiscal policy in maintaining economic equality.
In recent years, however, economists have argued that monetary policy can help achieve economic equality and play a complementary role.
Equal distribution of income is the smoothness or equality with which income is distributed among members of society. If everyone earns exactly the same amount, the income distribution is perfectly equal.
Types of monetary policies
The design of monetary policy changes according to the goals set for monetary policy and emerging economic scenarios.
Monetary policy is called expansionary monetary policy and contractionary monetary policy.
Expansionary monetary policy
Expansionary monetary policy aims to increase spending by businesses and consumers by making borrowing cheaper.
As part of expansionary policies, monetary authorities often cut interest rates to encourage spending and discourage saving.
Central banks increase the money supply, lower interest rates, and increase demand. It promotes economic growth.
Contractionary monetary policy
Contractionary monetary policy forces people to spend less by making it more expensive to borrow money.
The contractionary monetary policy raises interest rates, slows money supply growth, and lowers inflation.
This could slow economic growth and even increase unemployment, but is often seen as necessary to keep the economy cool and prices down.
Instruments of Monetary Policy
Instruments stand for tools or equipment to accomplish work. Basically, instruments of Monetary policy are classified as quantitative and qualitative.
A list of quantitative instruments are:
- Cash reserve ratio
- Statutory liquidity ratio
- Repo Rate
- Reverse Repo Rate
- Bank Rate
- Open market operations
Qualitative instruments of Monetary policy are:
- Credit rationing
- Consumer credit
- Regulation, requirements
- Margin requirements
- Moral Suasion
Fiscal Policy
Fiscal policy refers to the way governments influence and manages the economy by adjusting taxes and public spending. The balance between falling unemployment and falling inflation.
The most important instruments of fiscal policy are changes in the tax system and the composition of government spending.
Fiscal policy means actions by governments that affect revenues and expenditures.
This is usually measured by government revenue, its surplus, or deficit.
Fiscal Policy Goals
Goals are:
- Maintain and achieve full employment.
- Price level too low.
- To slow down the economy to control hyperinflation.
- Maintain a balance of payments symmetry
- Supporting currency development in developing countries.
Fiscal Policy Instruments:
The most important fiscal policy instruments are listed below.
- Public expenditure
- Taxation
- Government bond
- Budget deficits
Public Expenditure
Public Expenditure is expenditure by the government of a country. It has a substantial impact on the country's gross demand and development activities.
For public spending, the government has two choices.
I. Government Expenditures on Procurement of Goods and Services.
II. Public funds for pensions, scholarships, education, medical facilities, etc. for persons. It also increases the total demand.
Taxation
The modern state is a welfare state that needs to spend money. Taxes are the main source of making money. Aggregate demand is also affected by taxes. Governments raise money by imposing various taxes to fund public spending.
Manages various development activities. Mainly for tax purposes, they can be divided into two groups.
Direct Taxes: Direct taxes reduce income and part of the income of goes into the State Treasury.
Indirect Taxes: Indirect taxes increase the price of goods. Both direct and indirect taxes reduce aggregate demand.
Government Bonds
The third instrument of fiscal policy is government debt. A public bond is a debt owed by a country.
Government by the people or by the government of another country. Governments will have to take help from government debt if public spending exceeds public revenues. There are two types of national debt: inside and outside.
Budget deficit
Economic development requires public spending. This amount is collected only from government bonds, taxes, etc. Therefore, deficit spending should be introduced. When expenditures exceed revenues and a deficit is made up by borrowing from the central bank or issuing new banknotes. Deficit funds can be used to cover government spending. It increases aggregate demand.
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