Monetary policy to check inflation/ deflation includes _______.
Monetary policy to check inflation/ deflation includes _______.
The correct option is D all the three
Monetary policies refers to the quantitative and qualitative measures taken by the central bank to correct the situation of inflation and deflation in the economy. These measures are as follows: 1. Quantitative Methods
of monetary policy includes those instruments which focus on the overall supply
of the money. It includes:
A. Two Policy
Rates:
Bank rate is
the rate charged on the loans offered by the Central bank to the commercial
banks without any collateral. It is increased at the time of inflation to
reduce the money supply in the economy and vice versa.
Repo
rate is the rate charged on the secured loans offered by the Central bank
to the commercial banks that includes collateral. It is increased at the time
of inflation to reduce the money supply
in the economy and vice versa.
B. Two Policy
Ratio:
Statutory
Liquidity Ratio (SLR) refers to liquid assets that the commercial banks must
hold on daily basis as a percentage of their total deposits. SLR is determined
by the central bank and is a legal requirement to be fulfilled by the
commercial banks. It is increased at the time of inflation to reduce
the money supply in the economy and vice versa.
Cash Reserves
Ratio (CRR) refers to the proportion of total deposits of the commercial
banks which they must keep as cash reserves with the central bank. The
ratio is fixed by the central bank and is varied from time to time to control
the supply of money in the economy depending upon the prevailing situation of inflation
or deflation.
C. Open Market
Operations:
Open market
operation (OMO) is a monetary policy by the central bank in which the bank
deals in the sale and purchase of securities in the open market to control the
supply of money in the economy. By selling the securities, the central bank
soaks liquidity from the economy and by buying the securities, the central bank
releases liquidity.
2. Qualitative Methods of monetary policy includes
those instruments which focus on the selected sectors of the economy. It
includes:
A. Margin
Requirement:
Margin
requirement refers to the difference between the current value of the security
offered for loan (called collateral) and the value of loan granted. It is
a qualitative method of credit control adopted by the central bank in order to
stabilize the economy from inflation or deflation.
B. Rationing
of Credit:
Rationing of
credit refers to fixation of credit quotas for different business activities
which is introduced when the flow of credit is to be checked particularly for
speculative activities in the economy.
C. Moral
Suasion:
The central
bank makes the member bank agree through persuasion or pressure to follow its
directives which is generally not ignored by the member banks. The banks are
advised to restrict the flow of credit during inflation and be liberal in
lending during deflation.
1. Quantitative Methods of monetary policy includes those instruments which focus on the overall supply of the money. It includes:
A. Two Policy Rates:
Bank rate is the rate charged on the loans offered by the Central bank to the commercial banks without any collateral. It is increased at the time of inflation to reduce the money supply in the economy and vice versa.
Repo rate is the rate charged on the secured loans offered by the Central bank to the commercial banks that includes collateral. It is increased at the time of inflation to reduce the money supply in the economy and vice versa.
B. Two Policy Ratio:
Statutory
Liquidity Ratio (SLR) refers to liquid assets that the commercial banks must
hold on daily basis as a percentage of their total deposits. SLR is determined
by the central bank and is a legal requirement to be fulfilled by the
commercial banks. It is increased at the time of inflation to reduce
the money supply in the economy and vice versa.
Cash Reserves
Ratio (CRR) refers to the proportion of total deposits of the commercial
banks which they must keep as cash reserves with the central bank. The
ratio is fixed by the central bank and is varied from time to time to control
the supply of money in the economy depending upon the prevailing situation of inflation
or deflation.
C. Open Market Operations:
Open market
operation (OMO) is a monetary policy by the central bank in which the bank
deals in the sale and purchase of securities in the open market to control the
supply of money in the economy. By selling the securities, the central bank
soaks liquidity from the economy and by buying the securities, the central bank
releases liquidity.
2. Qualitative Methods of monetary policy includes those instruments which focus on the selected sectors of the economy. It includes:
A. Margin Requirement:
Margin
requirement refers to the difference between the current value of the security
offered for loan (called collateral) and the value of loan granted. It is
a qualitative method of credit control adopted by the central bank in order to
stabilize the economy from inflation or deflation.
B. Rationing of Credit:
Rationing of credit refers to fixation of credit quotas for different business activities which is introduced when the flow of credit is to be checked particularly for speculative activities in the economy.
C. Moral Suasion:
The central bank makes the member bank agree through persuasion or pressure to follow its directives which is generally not ignored by the member banks. The banks are advised to restrict the flow of credit during inflation and be liberal in lending during deflation.
