is Government Budget is an important monetary policy instrument?
Answers
Explanation:
Monetary policy refers to the actions of central banks to achieve macroeconomic policy objectives such as price stability, full employment, and stable economic growth. Fiscal policy refers to the tax and spending policies of the federal government.
Fiscal policy affects aggregate demand through changes in government spending and taxation. Those factors influence employment and household income, which then impact consumer spending and investment. Monetary policy impacts the money supply in an economy, which influences interest rates and the inflation rate.
Government Budget is not a monetary policy instrument.
Monetary policy is the policy relating to the regulation of money supply in the economy, rate of interest, and availability of money to everyone within the economy, with a view to combating the situation of an inflationary or deflationary gap in the economy. This policy is taken by the Central Bank of the country.
(i) Bank Rate (Repo Rate): It is the rate at which the Central Bank lends to the commercial banks as a lender of last resort.
- During inflation, the bank rate is increased to reduce the money supply in the economy. This happens because the Commercial banks go on to levy heavier interests on their loans which discourages the public from taking one.
- It will imply a check on the borrowing from commercial banks. Thus, overall supply of money/credit is reduced in the economy. During deflation, bank rate is lowered leading to increase in supply of money/credit.
(ii) Cash Reserve Ratio (CRR): Cash Reserve Ratio is a specified percentage of the bank deposits, that a commercial bank receives, that it is required to keep with the Central Bank in the form of reserves or balances.
- The higher the CRR, the lower will be the amount of money with the banks, which results in fewer loans given out which, in turn, puts a check on the money supply in the economy and vice versa.
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