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Section-B (Short Answer Questions).
Q. 1. Define the main tools for monetary policy.
Ans. Monetary policy is declared by the Central Bank of any country. Monetary policy comprises all the monetary measures applied by the monetary authority with a view to produce a deliberate impact on the volume of the money.
Moneyhere can broadly be divided into four categories:
1. M1 (Narrow money) = Currency with the public (currency notes, coins) + demand deposits with bank (current and savings A/C) + other deposits with RBI.
2. M2 = M1 + Savings deposits with the post office.
3. M3 (Broad money) = M1 + other deposits with banks.
4. M4 = M3 + other deposits with post office.
Monetary Policy Tools
1. Monetary Base: Monetary policy can be implemented by changing the size of the monetary base. This directly changes the total amount of money circulating in the economy.A central bank can use the open market operations to change the monetary base. The Central Bank can buy and sell bonds in exchange of hard money. When the central bank disburses or collects this hard money it alters the amount of money in the economy.
2. Reserve Requirements: The monetary authority exerts regulating control over banks. Monetary policy can be implemented by changing the proportion of the total assets as needed by the bank to reserve it with the Central Bank. Banks only maintain a small proportion of their assets as cash available for immediate withdrawal. The rest are invested in non-liquid assets like mortgage and loans.
3. Discount Window Lending: Many Central Banks have the authority to lend funds to the financial institutions within their country. The lended funds represented an expansion in the monetary base.
4. Interest Rates: Monetary authority in different nations have differing levels of control over economy-wide interest rates. This rate has effect on the other market interest rates, but there is no direct definite relationship. By altering the interest rate under its control, a monetary authority affect the money supply.
5. Bank Rate Policy: The bank rate is also known as the discount rate. It is the oldest instrument of monetary policy. The bank rate is the rate at which the Central Bank rediscounts the eligible bills. Today, the term bank rate is used in broader sense and refers to the minimum rate at which the central bank provided financial accomodation to commercial bank in the discharge of its function as the lender to the last resort. The importance of bank rate lies in fact it acts as a pace-setter to all other rates of interests.
6. Open Market Operations: Open market operations broadly refer to the purchase and sale of the variety of assets by the Central Bank such as-foreign exchange, gold, government securities and even company shares.
7. Variable Cash Reserve Ratio [CRR] : Commercial banks in every country have to keep a certain amount of total deposits with the Central Bank and can lend the remaining into other investment projects. So, if the CRR is increased, the money supply will be decreased and vice-versa.
Q. 2. Discuss the role of fiscal policy in a developing country like India, especially in removing income disparities.
Or Explain the limitations of fiscal policy of India and give
the suggestions for improvement
of fiscal policy.
Ans. Full employment in an economy means a state where all the persons who have readiness to work at current rates of wages get work to do. In no case it means absence or zero unemployment in the economy. Not all these seeking employment will be employed at any one time because, in a changing economy some persons will always be between jobs and seeking new employment.
In an underdeveloped economy, the problem of unemployment is slightly different from that in an advanced economy, is that in developed economies it is oriented primarily to the necessity of maintaining full employment against cyclical depression. On the other hand, in the underdeveloped economy, the problem has two dimensions, namely cyclical as well as disguised. The cyclical unemployment in the underdeveloped economy originates from external causes. Mostly the under developed countries, which are export oriented as they export their primary products to advanced countries, through full in prices of primary goods exported by them to the developed countries.