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.
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.
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.
picture credit: www.slideshare.net
No comments:
Post a Comment