Economics Questions and Answers

1) (a) Analyse both the conventional and unconventional tools used by central banks.

1)a) Monetary Policy

There are diverse objectives situated by the Government for these policies which they point at attaining these objectives are:

Support Cash Flows :Through Monetary strategy just the central bank has the ability to uphold the money inflows and surges relying on the budgetary.

Exchange rates: A stable exchangerate of the country’scurrency in the foreign money. Accepting that the rate of trade is stable it pushes the import fare of merchandise.

Imports and export facility: The policies particularly focus on empowering exchanges and trade as imports and fares between the nations all the more successfully.

Credit Facility: These strategies helps the national bank in its capacity which is the directed improvement of bank credit and money supply. So it arrives at to anyone who needs it.

Price Control: Inflation is a pointer to expanding investment development however it ought to be in a point of confinement to keep that in utmost national bank requirements to support the costs of products and administrations.

Instruments of Monetary Policy:

1.Conventional Instruments:

a. Open Market Operations

It is an instrument which is incorporated in these policies which incorporates purchasing or selling of securities like bonds, bills, etc. from or to the banks. The RBI offers government securities to decrease the credit supply in the economy and buys government securities to expand or energize credit supply in the economy.

b. Cash Reserve Ratio

This ratio is a piece of individuals' which is kept as stores with the RBI as stores .

c. Statutory Liquidity Ratio

Each one bank has a requirement to keep an altered measure of store with themselves as security which could be as cash, important metals, embraced securities like treasury bills, bonds et cetera.

d. Bank Rate Policy

The bank rate is the rate of premium charged by the RBI for offering credit to the banks. The credit is given either specifically or by obtaining instruments like treasury bills, offer, business bills, and so on

e. Repo Rate and Reverse Repo Rate

Repo rate is the interest rate at which national bank gives cash to the banks as loans. Reverse Repo rate is the interest at which national bank gets money from the banks. The increase in the repo rate and decrease in the reverse repo rate will lead to reduction in the cash supply in the economy.