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Wednesday, 25 May 2011

What is Monetary Policy and discuss the objectives of Monetary Policy

Meaning of Monetary Policy :-
Monetary policy refers to the measures which the central bank of the country takes in controlling the money and credit supply in the country with a view to achieving certain specific economic objectives.

Objectives of Monetary Policy :-

The objectives of monetary policy differ from country to country according to their economic conditions. In the less developing countries like India or Pakistan its objective may be the maintenance of monetary stability and help in the process of economic development. In the developed countries its objective may be to achieve full employment, without inflation. Anyhow following are the main objectives of the monetary policy.

1. Control of Inflation and Deflation :-
Inflation and deflation both are not suitable for the economy. If the price level is reasonable and there is an adjustment between the price and cost, rate of out put can increase. Monetary policy is used to coordinate the cost and price. So price stability is achieved through the monetary policy.

2. Exchange Stability :-
Monetary policy second objective is to achieve the stable foreign exchange rate. If the rate of exchange is stable it shows that economic condition of the country is stable.

3. Economic Development :-
Monetary policy plays very effective role in promoting economic growth by providing adequate credit to productive sectors.

4. Increase in the Rate of Employment :-
Monetary policy another objective is to achieve full employment but without inflation.

5. Equal Distribution of Credit :-
Monetary policy should also ensure that distribution of credit should be equitable and purposeful. The credit priority should be given to backward areas.

6. Improvement in Standard of Living :-
It is also the major objective of the monetary policy that it should improve the quality of life in the country.

These are the objectives of the monetary policy but efforts should be made to minimize the conflicts.

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