TYPES OF MONETARY POLICY

The monetary policy is designed by considering the existing situation and outlook of the economy along with priorities, policies and programs of the government’s budget.

There are following two types of monetary policy:

1. Expansionary/ Cheap/ Ease monetary policy :

Expansionary monetary policy is the monetary policy that is designed to increase the aggregate demand in an economy. It is also called ‘Cheap/ Ease monetary policy’. As we know, the aggregate demand falls during the period of recession. So, this policy is implemented to overcome recession and encourages to expand credit in an economy. This is done through:

• Reducing the bank rate
• Reducing CRR
• Purchasing securities (bills and bonds) in open market and so on.

Under this kind of monetary policy, the monetary authority makes a deliberate effort to increase the money supply in the economy.


2. Contractionary/ tight/dear/ restrictive monetary policy:

Contractionary monetary policy is the monetary policy that is designed to decrease the aggregate demand in an economy. It is also called ‘tight/dear/ restrictive monetary policy’. As we know, the aggregate demand rises during the period of inflation. So, this policy is implemented to overcome inflation and discourage the expansion of credit in an economy. This is done through: 

• Raising bank rate
• Raising CRR
• Selling securities (bills and bonds) in open market and so on

Under this kind of monetary policy, the monetary authority makes a deliberate effort to decrease the money supply in the economy.















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MONETARY POLICY

   
  Among several functions of central bank, monetary policy is regarded as one of the important function. Monetary policy is a policy that helps to maintain the price and interest rate at the desired level - through the management of supply of money in the economy. The level of money is managed by increasing or decreasing the supply of money by the monetary authority (i.e. central bank).

Definition and views:

According to Harry G. John:

“Monetary policy is the policy employing the central bank’s control on the supply of money as an instrument for achieving the objectives of general economic policy.”

According to G.K. Shaw:

“Monetary policy is any conscious action undertaken by central monetary authority.”

According to Edward Shapiro:

“Monetary policy is the central bank’s control over the money supply as an instrument for achieving the objectives of general economic policy.”

So, in order to achieve the macro-economic goals, the central bank formulates the monetary policy aligned with the fiscal policy of the government. In other words, the monetary policy is designed by considering the existing situation and outlook of the economy along with priorities, policies and programs of the government’s budget.

Objectives of monetary policy:

The basic objectives of monetary policy are as follows:

• To make Price level stable

• To achieve full employment

• To make interest rate stable

• To make the Exchange rate stable

• To achieve rapid economic growth

• To Correct the adverse BOP

• To Induce savings

• To Invest the savings

• To Create and expand Financial Institution

• To reduce economic inequality

Types of Monetary Policy:

Generally, monetary policy is divided into following two types:

1. Expansionary/ Cheap monetary policy

2. Contractionary/tight/ restrictive monetary policy

Instruments of Monetary Policy:

Instruments of monetary policy represents a tool through which the central banks controls the supply of money and regulates credit creation in the nation. The main instruments of monetary policy are as follows:

A)   Quantitative / General /indirect instruments of Monetary Policy :

• OMO (Open Market Operation)

• Reserve Requirement/ Variation of cash reserves

• Bank Rate /Discount Rate

B)   Qualitative / selective/ Direct instruments of Monetary Policy

• Regulation of Margin requirement

• Regulation of consumer credit

• Moral suasion

• Credit rationing

• Publicity

• Direct action

• Interest Rate ceiling

• Differential re-discounting rates

• Differential CRR for different deposits

• Portfolio Regulations

The central bank is established to formulate necessary monetary policies as well as foreign exchange policies - to maintain the price stability and consolidate balance of payment (BOP) for the sustainable development of country.

Nepal Rastra Bank being the central bank of Nepal, is governed by Nepal Rastra Bank Act, 2002. Since 2002/03 the central bank has been publicly issuing monetary policy.  In addition to this, the bank releases quarterly and half-yearly review of the policy. However, the necessary amendments in Nepal Rastra Bank Act, 2002 has been made and Nepal Rastra Bank Act, 2016 has been enforced by consolidating the federal structure and other environmental issues.

The new constitution of Nepal, 2015 has changed the federal structure of Nepal. The Federal, state and local governments have been formed. 

In the alignment of government budget, studying the global scenario of economic outlook, suggestions from the stakeholders - Nepal Rastra Bank frames the monetary policy to safeguard macroeconomic and financial stability, widen financial inclusion and achieve targeted economic growth.

Bloggers Note: For more details keep on visiting the blog

PRODUCTION POSSIBILITY CURVE

Hi readers!

Today, Let us understand about production possibility curve.

In a very simple language,

Production possibility curve is the locus of various combination of two goods or services which an economy can produce by mobilizing its available resources in its optimum way. It is also known as “Transformation Curve” because resources are transformed from one product to produce other product.

As we know that, Professor Lionel Robbins of London school of Economics had defined economics entirely in terms of scarcity and choice in his book “An Essay on the Nature and Significance of Economic Science” published in 1932 A.D.   

As per modern economists Prof. Lionel Robbins and his followers like Karl Manger, Peter, Stigler, Scitovosky etc. :-

• Human Wants are Unlimited (If one wants gets satisfied another creeps on)

• Means have alternative uses

• Wants differs in urgency (Some wants are more urgent than other)

• Means to satisfy those unlimited wants are limited

• Therefore, Problem of choice occurs

 These problem of an economy are graphically explained by the help of production possibility curve.

Assumptions made by Economists to apply the concept of Production Possibilities Curve:

• An Economy produces only two goods and services.

• All the available resources are limited and fully utilized

• There is no change in Resources and Technology

• Factors of Production are fully mobile from one use to other

On the basis of these assumptions, following production possibility schedule is prepared:

Production Possibilities	Product X (‘000 units)	Product Y (‘000 units)
A	0	20
B	1	19
C	2	16
D	3	12
E	4	5
F	5	0

Explanation of  Production Possibility Schedule:

On the basis of above assumptions, An Economy produces only two goods and services named Product X and Product Y at fully utilized resources. There are several production possibilities shown in above table from A, B, C, D, E and F.

In an economy there can be only three cases:

1. Produce only Product Y (Use all its resources to produce Y i.e Production Possibilities A)
2. Produce only Product X  (Use all its resources to produce X i.e   Production Possibilities F )
3. Produce some Product X and some Product Y (Diversify the resources to produce both goods i.e Production Possibilities B,C,D and E )

Representing the above Production Possibilities schedule in graph we find the following curve:

In the above figure:

OX and OY represents X-axis and Y-axis that shows Product X (‘000 units) and Product Y (‘000 units) respectively.

A is the point where only product Y is produced and F   is the point where only product X is produced. Similarly, B, C,D and E  are the various production combinations whereby both of the products are produced accompanying the above assumptions. A curve obtained by combining all the points from A  to F is known as Production Possibility Curve.

It is to be noted that, an economy can’t choose a point G or point H – as it violates the assumption of Production Possibility Curve.

• At point G - there would be some unused resources.
• At point H - there would be resource constraints.

Therefore, Production Possibility Curve is also known as “Transformation Curve” because resources are transformed from one product to produce other product.

However, the Production Possibility Curve may have shift ( Rightward or Leftward ) depending upon the following two main reason:

1. Change in Resources
2. Change in Technology

If there is positive change in Resources and Technology the Production Possibility Curve will shift upward to the right and if there is negative change in Resources and Technology the Production Possibility Curve will shift downward to the left.

This can be shown by following figure:

In the above figure:

OX and OY represents X-axis and Y-axis that shows Product X (‘000 units) and Product Y (‘000 units) respectively.

AF shows initial Production Possibility Curve. Similarly, A’F’ shows unfavorable change in Resources and Technology whereas A”F” shows the favorable changes in Resources and Technology in an economy. This has resulted shift in Production Possibility Curve. 

Here, A’F’ shows downward shift in Production Possibility Curve and A”F” shows upward shift in Production Possibility Curve.

Therefore, P.A.Samuelson has rightly remarked as -

“Production possibility curve is that curve which represents the maximum amount of a pair of goods and services that can be produced with an economy’s given resources and technique, assuming that all resources are fully employed.”

PRICE LINE

Suppose the price of commodity ‘x’ is RS. 100 and price of commodity ‘y’ is Rs. 50 and a consumer has Rs. 2000 to spend per month on goods x and goods y.

a) Sketch the consumers budget constraint

b) Assume that he splits his income equally between x and y. show whether the consumer ends up on the budget constraints.

c) Suppose that the income rises from Rs. 2000 to Rs. 4000. Sketch the new budget constraint.

d) Assume that he again splits total budget equally into two goods. Show where the consumer ends up on new budget constraint.

From the above information we have:

• The total Budget of the consumer (B ) = Rs. 2000
• Price of the commodity x (Px) = Rs 100
• Price of the commodity y (Py) = Rs 50

a) Computation of consumers budget constraints:

As we know,

Under Price Line :

B = Px x Qx + Py x Qy

Or, 2000 = 100X + 50Y……….(.i)

A)Suppose that consumer spends his entire budget in order to purchase commodity X (i.e Qy = 0)

Then the equation ( I ) becomes:

2000 = 100X + 50 x 0

Or, 100x = 2000

Or, x = 20 units.

This gives the coordinate (X, Y) as (20, 0)

Similarly,

Suppose that consumer spends his entire budget in order to purchase commodity Y (i.e Qx = 0)

Then the equation (I) becomes:

2000 = 100 x 0 + 50Y

Or, 50Y = 2000

Or, Y = 40 units

This gives the coordinate (X, Y) as (0, 40)

Plotting the coordinates of above graphically, we get the following:


b) Assuming that he splits his income equally between x and y then, Computation of whether the consumer ends up on the budget constraints or not :


As we know, if the consumer equally divides or splits his budget: (i.e Rs. 1000 in goods x and Rs. 1000 in goods y )

Qx = B/ Px = 1000 / 100 = 10 units.

This gives the coordinate (X,Y ) as (10, 0)

Similarly,

Qy = B / Py = 1000 / 50 = 20 units.

This gives the coordinate (X,Y ) as (0,20)

Therefore, the new budget equation becomes:

10 Px + 20 Py = 2000

Plotting the coordinates of above graphically, we get the following:


C ) Sketching of the new budget constraint when the income rises from Rs. 2000 to Rs. 4000:

The new Budget (B ) = Rs. 4000

Suppose that consumer spends his entire budget in order to purchase commodity X (i.e Qy = 0)

We know, Qx = B/ Px = 4000 / 100 = 40 units.

This gives the coordinate (X,Y ) as (40, 0)

Suppose that consumer spends his entire budget in order to purchase commodity y (i.e Qx = 0)

We know, Qy = B/ Py = 4000 / 50 = 80 units.

This gives the coordinate (X,Y ) as (0, 80)

Therefore, the new budget equation becomes:

40 Px + 80 Py = 4000

Plotting the coordinates of above graphically, we get the following:



D ) If he again splits total budget equally into two goods, then computation of the consumer ending up on new budget constraint:


As we know, if the consumer equally divides or splits his budget: (i.e Rs. 2000 in goods x and Rs. 2000 in goods y )

Qx = B/ Px = 2000 / 100 = 20 units.

This gives the coordinate (X,Y ) as (20, 0)

Similarly,

Qy = B / Py = 2000 / 50 = 40 units.

This gives the coordinate (X, Y) as (0, 40)

Therefore, the new budget equation becomes:

20 Px + 40 Py = 4000

Plotting the coordinates of above graphically, we get the following:

PRACTICAL APPROACH TO MARKET EQUILIBRIUM AND EFFECT OF TAX

The market supply and demand function are as follows:

Qd =1200-2P

Qs = 4P

On the basis of this information, answer the following:

a) Determine the equilibrium price and quantity

b) What is the effect of tax Rs 50 per unit on production?

Solution:

In the above question, the demand function is :

Qd =1200-2P

Similarly, the supply function is :

Qs = 4P

a) Computation of equilibrium price and quantity
As we know, at equilibrium point the market demand equals market supply.

In other words,

Qd = Qs

Putting the values of Qd and Qs

1200-2P = 4P

6P = 1200

Or, P = Rs.200


Now, putting the value of P in demand function

Qd = 1200 – 2p = 1200 -2 x 200 = 800 unit.


Similarly, putting the value of P in supply function

Qs = 4P = 4 X 200 = 800 unit.


Therefore, the required equilibrium price and quantity is Rs. 200 and 800 units respectively.

b) Computation of Effect due to tax of Rs 50 per unit on production:

Since, the effect of tax do not affect the market demand function but affects the market supply function, we need to first compute the new market supply function by considering the effect of tax.

Market Demand Function:

Qd = 1200 – 2P

Market Supply Function:

Qs = 4 (P – 50 )

Or Qs = 4P – 200

Again, at Market Equilibrium Point

Qd = Qs

Putting the values of Qd and Qs

1200-2P = 4P – 200

Or, 6P = 1400

Or, P = Rs. 233.33

Now, Putting the value of P in demand function

Qd = 1200 – 2p = 1200 -2 x 233.33 = 733.33 = 733 unit


Similarly, putting the value of P in supply function

Qs = 4P – 200 = 4 X 233.33 – 200 = 733.33 = 733 unit



Therefore, the new equilibrium price and quantity is Rs. 200 and 800 units respectively.

	Effect before tax	Effect after tax
Price	Rs. 200	Rs. 233.33
Quantity	800 Unit	733 unit

The effect of tax is that, it increases the price and decreases the quantity.

Tutorial Note :

                   

If there would be subsidy in the question then, add the government subsidy in the supply function and solve the problem accordingly. Subsidy decreases price and increases quantity.

CAPITAL FLIGHT

It is simply, moving out the large sum of money from the nation. 

In other words, it is moving out large amount of capital from your home country to foreign country. 


The reasons could be :

• Political instability 

• Currency devaluation 

• Defective system of capital control

• Legal instability

• Type of exchange rate system adopted by the country for international trade.

• The rise of digital money

• Increased Money Laundering activities 

• Fear of increased Capital Gains Tax (CGT) 

• Fear of decreasing the strength resource of the Nation for which it is recognized. 

Capital flight can be legal or illegal. If the government, through its stringent rules that discourages the movement of capital from their country- then the capital flight could be said to be legal. However, if foreign investors tries to create a situation of capital blocks through restrictions of trade activities it would be called as illegal capital flight. 

Generally, illegal capital flight is increased if the governmental laws, rules and controls- are more stringent and rigid in nature. If we analyze the situation of 1970-1980 of India capital flight, we can find that, there were billions of dollar currency moving out of the country. The researchers found that, the main reason behind it was stringent rules in relation to currency controls. 

Similarly, Due to high inflation and devalued currency - Argentina has faced a huge capital flight for years. 

The deep rooted economic and political difficulties have given the birth to the situation of capital flight. The situation of civil war has encouraged the capital flight in Pakistan, Nigeria and others.

When we talk about the exchange rate system in international trade, we can find three exchange rate system.They are :

• Floating Exchange Rate System

• Fixed Exchange Rate System

• Controlled Exchange Rate System 

Nepal has adopted Pegged Exchange Rate System. This has also been one of the reason of capital flight for the country. Researchers has agreed that,  pegging with Nepalese currency has led to the appreciation of currency in line with Indian currency. On contrary, it has also increased trade deficit as well as Forex currency reserve of Nepal. 

Most of the commercial banks in Nepal provides interest from 3-5 % to their depositors whereas, India provides 8-9% interest to their savers. This has encouraged Nepalese depositors (both households and business persons) to swift their deposits to India. Similarly, textiles, automobiles, agriculture or electronics- the imports based economy has placed a burden of capital flight for Nepal.


In order to control the situation of capital flight, most of the nations has made a currency control laws as to - utmost currency amount that could be taken out of the country. Different countries has also made laws to encourage Foreign Direct Investment rather than Foreign Portfolio Investment. 

In conclusion,

Capital Flight not only decreases the purchasing power of the country but also makes imports and foreign facilities expensive.

Pic.Credit :www.canstockphoto.com

Modern Government HR Vs Traditional Government HR

Since a decade, the staffing system of governmental jobs has been found more and more structured, fair and competitive.

Gone are the days, where people used to take government staffs for granted.

The Public Service Commission has been found to be successful in digging out the best resources from the market, by conducting -

·         -Written exam

·         -Practical exam

·         -Interview

·         -Any other ways as per necessity of the commission

It is said “warriors must have best weapon to win the battlefield”. Same is the case with these filtered human resource. They can perform their best only if they have sound non-human resources within their set of parameters. The staffs are always willing to work day and night for the benefit of the organization.

The over qualified staffs has been appointed for the governmental jobs. This has brought both opportunities and threat for the organization. On the one hand, the organization is benefited from the capabilities of the human resource, on the other hand, they find difficult to cope up with the volatility of the employee turnover. This has given rise to a paradigm shift.

I strongly believe that, in order to achieve success for any organization, the demographic composition of different group of people plays an important role in the society. All new, semi-old and old generation staffs are equally important. A flowing river (young and energetic staffs) must have two definite boundaries (older staffs) and a bridge (semi-old staffs) to get it into the right track. Absence of any, or higher presence of any, will definitely bring challenges to cope up with the dynamism of environment. 

Technological change has definitely shorten the period of generation gap. There is a great degree of threat from getting technologically obsolete day by day. The communication system of web 2.0 has compelled human resource to either boom or get doomed from the market.

The new era of human resource employed in governmental jobs has been provoking the traditional rules, structure, framework, working patterns, and ethical behavior as the pace of change.

Out of the thousands of prospective candidates, only limited people are selected for the appointment. Although, students puts their utmost effort in order to be a part of government jobs. However, due to limited seats, only the best are able to get into the list. 

So, the general public must be aware that, new governmental employees are much more energetic, capable, smart, flexible, dynamic, visionary and ethically governed –as compared to the traditional staffs. Therefore, it is the time to change the mind set of people.