Sunday, September 5, 2021

TYPES OF MICRO ECONOMICS

    The analysis of microeconomics is always affected by time period. But there are still some economists who do not believe the time value in microeconomics analysis. Based upon the equilibrium of microeconomics in the different situation and relationship between time and different economic models, the microeconomics is divided into three different types, namely Microsatics, Comparative Micro statics and Micro Dynamics.

 

a. Micro Statics:

Demand and supply are two principal variables that determine the equilibrium level for market. The quantity demanded of a good at a time is generally considered to be related to the price of that particular time. Same way supply is also related to price at particular static time. Thus microeconomics tries to find out the equality of demand and supply at a particular point of time or static time. This static analysis is the study of static relationship between two variable called demand and supply, which is known by micro statics. In other words, if the functional relationship is established between two principles variable at a same period of time, such analysis is known by micro static. This situation is also known by equilibrium situation of variables. This equilibrium determines the equilibrium price and quantity. According to Schumpter, “By static analysis, we mean, method of dealing with economic phenomena that tries to established relations between elements of the economic systems-prices and quantities of commodities all of which have the same time subscript, that is to say, refer to the same point of time.” He further said, “Static analysis tries to establish relation between elements of the economic system which refer to the same point of time.”

 

The concept of micro static is given below with the help of diagram.


 




In the diagram given above, DD shows demand curve and SS shows supply curve. Both curves intersect at point ‘E’ that gives the equilibrium price- P and quantity- Q at particular time period. This is static analysis.

 

b. Comparative microstatics:

Micro static explains about the equilibrium point that is obtained by two co- operant factors that is demand and supply, under the static or given period of time. Thus equilibrium is obtained when demand equals supply under the condition of ‘other things remaining same’ or ‘no change’. When variables change, the initial equilibrium level will be disturbed. This brings the process of disequilibria and it continues till new equilibrium is obtained. In this background it is essential to analyze the comparison between these two equilibrium levels. The comparison between these two different equilibriums is studied under comparative microstatics. It compares one equilibrium with other equilibrium but does not identify the process of disequilibria that occurs. According to Prof. Schneder; “The comparative analysis of two equilibrium positions may be defined as comparative static analysis. Since, it studies the alternation in the equilibrium position corresponding to an alternation in a single datum.”

 

For example, suppose that income of consumer changes that affects to demand of consumer and regarding supply, initial equilibrium distributes and new equilibrium is obtained. Same way due to change in the technology, production function, then cost and hence supply change and this affects the initial equilibrium. Thus in both cases- either demand changes or supply changes, two equilibrium appear- initial and later. Comparative micro statics studies those two equilibriums.

 

The diagram given explains the comparative micro statics equilibrium. In the diagram, demand curve DD and supply curve SS gives the equilibrium point ‘E’ at price- P and quantity- Q. due to changes in the demand, it shifts to D1D1 and new equilibrium point ‘E1’ is obtained with the same supply curve SS. This new equilibrium gives new price- P1 and quantity- Q1. Comparative micro statics studies the two equilibrium points ‘E’ & ‘E1’.

c. Micro dynamics

Study of microstatics shows the state of equilibrium through demand supply analysis under the assumption of constant time where no changes in variables take place. Same way study of comparative micro statics shows the comparison between two equilibriums due to partial change in factors and time period. But the world and time are neither static nor they partially change. The real world is dynamic. The change in time and other factors are dynamic and they lead to change in demand and supply hence change in equilibrium. Thus, micro dynamics refer to a position by which the system passes from one position of equilibrium to other. It is very essential to know change and process of change in equilibrium. In this analysis with the change in pace of time price of commodity also changes and that brings the change in demand and supply. Those changes bring the true picture of real world economy at different prices at different time. According to J.A. Schumpeter, “we call a relation dynamic if it connects economies quantities that differ to different points of time.” W.T. Bauomol said, “Economic dynamics to the study of economic phenomena in relation to preceding and succeeding events.” The other most important aspect of micro dynamic is that it deals with disequilibria condition also. The analysis chases process of change time by time. It can explain state of being disequilibria and how the disequilibria’s move towards equilibrium.

Limitation of Microeconomics

    Microeconomics is most important branch of economics. It is also known by foundation for whole economic analysis. It describes about the individual behavior of society and firm. According to William Flenar,” Microeconomics is related to the individual decision-making units.” It tells us how price and output level of any commodity is determined? How cost of production is determined? What we mean by market and its types? How wage rate and payment for capital is defined? How the government policy affects all such activities? etc. Beside such important aspects of microeconomics, it has some imitations as given below 

 

a) Individual analysis

Microeconomics explains only small individual units of economic activity. This is a partial and incomplete analysis. For the national economic analysis, aggregate income and output, aggregate production and expenditure show the economic level of country. All those subjects are not considered by microeconomics. So, it is regarded as the incomplete matter.

 

b) Impractical assumption

Most of theories and models of microeconomics are derived based upon some assumption for examples: other things remaining same, full employment, concept of rationality etc. In real life it’s near impossible to be fulfilled those assumptions. In our daily activities, there are many variable factors along with time. Those changes in variables bring the change in individual behavior that affects microeconomic activity. Same way, it is impossible to be full employment in economy.

 

c) Wrong concept of laissez faire economy

Microeconomics belief upon the concept of laissez faire economy, that means there should be no interfere in market economy by government. It has been explained in market life that government should interfere for its smooth activities. An event of great depression- 1930 had made failure to the concept of laissez faire.

 

d) Micro economics ignores the macro level activity

Real economic mirror of a country are employment, income, output, foreign trade, price level, impact of policy (monetary and fiscal) implementation etc. But microeconomics does not analysis all those subjects.

Wednesday, September 1, 2021

The Demand Schedule and the Demand Curve

            The demand schedule is generally represented by a table, which shows how the quantity demanded of a good varies with price, other things remaining constant. Table shows a hypothetical demand schedule for jackets sold per month at Mahendranagar.

Table

Price

(In rupees)

Quantity demanded

(In numbers)

500

450

400

350

300

250

200

150

10 lakhs

11 lakhs

12 lakhs

13 lakhs

14 lakhs

15 lakhs

16 lakhs

17 lakhs

            Table is constructed, based on the implicit assumption that the number of jackets demanded solely depends on their respective prices. Plotting the above figures in a graph, we can derive the demand curve. The graphical representation of the demand schedule is the demand curve, as shown in figure.



            The graph shows that the demand curve is downward sloping. A change in the quantity demanded is a movement along the demand curve caused by a change in the price of the good. A decrease in the price is reflected by a corresponding increase in the amount of quantity demanded. This inverse relationship between price and the quantity demanded is depicted in the shape of the demand curve. The downward slope of the demand curve reflects the law of demand, which states that other things remaining the same, if the price of any good decreases its quantity demanded increases and vice versa.

            There are however some instances where the law of demand does not hold goods. These are given below:

 

Firstly, if the concerned good is a Giffen good the rational consumer will go on decreasing his consumption of the good as the price falls. This is because a Giffen good is such that the consumer purchases less and less of the good as its price falls and vice versa. It was noticed by Giffen that when the prices of bread increases, consumers curtailed their consumption of meat and other expensive items and consumed more bread.

 

Secondly, a consumer may judge a good by its price. This behavior of the consumer is known as Veblem effect due to a change in price. Thus, when a price hike takes place for a good the consumer may be misguided to think that a quality improvement has taken place and he consumes more of the product.

 

Thirdly, it so happens that when the price of a good is on a rise the consumer it to rise further. In such a case he may purchase more and more units of a good as its price goes on increasing.

 

Fourthly, in the share market it is noted that when the price of a particular share raises its demand also increases to some people and vise versa.

 

In all the above cases it could be noted that the demand curve is upward rising instead of being downward slopping. This implies that, due to one unit increase in the price, the quantity demanded also increases by some amount, and vice versa.

The Concept of Demand and the Demand Function

Meaning of Demand

The term demand is defined as the number of units of particular goods or service that consumer are willing to purchase during a specific period and under a given set of period.

Demand is distinct from desire and generally it is confused with desire. We can desire for anything. A mere desire for a commodity will not encourage a producer to produce unless it is backed by purchasing power. A desire can be transformed into demand only when,

We have ability to pay i.e., income

Willingness to pay

It is possible to produce goods.

Time period; and

Price

            Demand for a commodity is always expressed in relation to particular price, Place and time. This is so because with the change in place, time and price demand for a commodity may be different. Therefore the demand for a commodity is the quantity to be bought by a person at a particular price place and time. According to Benham, "The demand for anything, at a given price, is the amount of it which will be bought per unit of time at that price."

            Various economists give various definitions According to port. Bridge

            "The term demand is defined as the number of units of particular goods or services that consumers are willing to purchase during a specific period and under a given set of conditions"

Demand function

            The change in other factors cause change in demand because these factors cause shift in demand curse A demand faction also expressed as like.

Qx = Py Px, T,Y,P,E,A,B,........)

Px = Price of ×commodity

T=Tastes of preferences,

Y= Income of the consumer

A= Advertisement expenditure

Q= quantity demanded of x commodity

E= Future price expectation

B= Income distribution in the economy,

Py = Price of related goods.

            This relation gives the mathematical relationship bet the quantity demanded of a commodity and various determinant of demand.

 

The Demand Function

            The amount of a good that a customer is willing to buy and able to purchase over a period of time, at a certain price is known as the quantity demanded of that good. The quantity desires to be purchased may be different from the quantity of good actually bought by the consumer. As quantity demanded is a flow concept, the relevant time dimension has to be mentioned which will indicate the quantity demanded per unit of time. Demand is a relationship between the price and the quantity demanded, other things remaining constant. Hence the other things imply, the factors, which influence the decision of the consumer to buy.

            If X1 denotes the quantity demanded and P1 its price per unit of the good, then other things remaining constant the demand function will be given as

                        X1 = f (P1)

            The function shows that quantity demanded depends on the price. This means that any change in price will result in a corresponding change in the quantity demanded.

            The change in the other factors cause change in demand because these factor cause shift in demand curve. A demand function also expressed as

Qx     =  F (PX, TP, y, PY, E, A, B...........)      

PX     =  price of X commodity.

TP   =  Taste and preferences

y     =  Income of the consumer

A     =  Advertisement expenditure.

E     =  Future price expectation

QX   =  Quantity demanded of the X commodity.

B     =  income distribution in the economy

PY    =  price of related goods.

            This relation gives the mathematical relationship between the quantities demanded of a commodity and various determinants of the demand

Sunday, July 4, 2021

नेपालको अर्थ व्यवस्थालाई परिवर्तन गर्न सकिने आधारहरु

नेपालको अर्थ व्यवस्थालाई परिवर्तन गर्न सकिने आधारहरु: काठमाडौं । सरकार र पार्टी मात्रै परिवर्तनले नेपाल देश विकास हुने अवस्था रहेको देखिँदैन । जबसम्म प्रणाली सुधार गरिँदैन नेता र पार्टीले मात्रै देशको विकास गर्न सक्दैनन् । नेपाली जनता यस भ्रममा परिरहेका देखिन्छन् कि सरकार परिवर्तन वा नेता परिवर्तनले देश विकास होला, देश विकास नीति परिवर्तनले हुन्छ भन्ने कुरामा सबैको ध्यान जान आवश्यक छ । राजनीतिक पार्टीले […]

Sunday, September 15, 2019

Long Run

How a Long Run Works

A long run is a time period during which a manufacturer or producer is flexible in its production decisions. Businesses can either expand or reduce production capacity or enter or exit an industry based on expected profits. Firms examining a long run understand that they cannot alter levels of production in order to reach an equilibrium between supply and demand.
In macroeconomics, the long run is the period when the general price level, contractual wage rates, and expectations adjust fully to the state of the economy, in contrast to the short run, when these variables may not fully adjust.
[Important: A long run is a period of time in which all factors of production and costs are variable.]
In response to expected economic profits, firms can change production levels. For example, a firm may implement change by increasing (or decreasing) the scale of production in response to profits (or losses), which may entail building a new plant or adding a production line.
The short run, on the other hand, is the time horizon over which factors of production are fixed, except for labor, which remains variable.

An Example of a Long Run

A business with a one-year lease will have its long run defined as any period longer than a year since it’s not bound by the lease agreement after that year. In the long run, the amount of labor, size of the factory, and production processes can be altered if need be to suit the needs of the business or lease issuer.

Special Considerations

Over the long run, a firm will search for the production technology that allows it to produce the desired level of output at the lowest cost. If a company is not producing at its lowest cost possible, it may lose market share to competitors that are able to produce and sell at minimum cost.
Economies of scale refer to the situation wherein, as the quantity of output goes up, the cost per unit goes down. In effect, economies of scale are the cost advantages that are achieved when there is an expansion of the size of production. The cost advantages translate to improved efficiency in production, which can give a business a competitive advantage in its industry of operations, which, in turn, could translate to lower costs and higher profits for the business.
The long run is associated with the long-run average (total) cost (LRAC or LRATC), the average cost of output feasible when all factors of production are variable. The LRAC curve is the curve along which a firm would minimize its cost per unit for each respective long-run quantity of output. As long as the LRAC curve is declining, then internal economies of scale are being exploited.
If LRAC is falling when output is increasing, then the firm is experiencing economies of scale. When LRAC eventually starts to rise then the firm experiences diseconomies of scale, and, if LRAC is constant, then the firm is experiencing constant returns to scale.
The long-run average cost curve is comprised of a group of short-run average cost (SRAC) curves, each of which represents one specific level of fixed costs. The LRAC curve will, therefore, be the least expensive average cost curve for any level of output.

Key Takeaways


  • A long run is a period of time in which all factors of production and costs are variable.
  • When the long-run average cost (LRAC) falls, is means output is increasing. If it rises, the firm experiences a diseconomy of scale.
  • Firms will search for the production technology that allows it to produce the desired level of output at the lowest cost.

Monday, December 11, 2017

Economic Cycle

Understanding the Economic Cycle

All countries experience regular ups and downs in the growth of output, jobs, income and spending.
UK Real GDP
Explaining the economic cycle
Boom
  • boom occurs when real national output is rising at a rate faster than the trend rate of growth. Some of the characteristics of a boom include:
  • A fast growth of consumption helped by rising real incomes, strong confidence and a surge in house prices and share prices
  • A pick up in demand for capital goods as businesses invest in extra capacity to meet strong demand and to make higher profits
  • More jobs created and falling unemployment and higher real wages
  • High demand for imports which may cause the economy to run a larger trade deficitbecause it cannot supply all of the goods and services that consumers are buying
  • Government tax revenues will be rising as people earn and spend more and companies are making larger profits – this gives the government money to increase spending in areas such as education, the environment, health and transport
  • An increase in inflationary pressures if the economy overheats and has a positive output gap
Slowdown
  • A slowdown occurs when the rate of growth decelerates – but national output is still rising
  • If the economy grows without falling into recession, this is called a soft-landing
Recession
A recession means a fall in the level of real national output i.e. a period when growth is negative, leading to a contraction in employment, incomes and profits.
A simple definition:
  • A fall in real GDP for two consecutive quarters i.e. six months
A more detailed definition:
  • A recession is a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and retail sales.
There are many symptoms of a recession – here is a selection of key indicators:
  1. A fall in purchases of components and raw materials (i.e. intermediate products)
  2. Rising unemployment and fewer job vacancies available for people looking for work
  3. A rise in the number of business failures and businesses announcing lower profits and investment
  4. A decline in consumer and business confidence
  5. A contraction in consumer spending & a rise in the percentage of income saved
  6. A drop in the value of exports and imports of goods and services
  7. Large price discounts offered by businesses in a bid to sell their excess stocks
  8. Heavy de-stocking as businesses look to cut back when demand is weak – causes lower output
  9. Government tax revenues are falling and welfare benefit spending is rising
  10. The budget (fiscal) deficit is rising quickly
The difference between a recession and a depression
  • slump or a depression is a prolonged and deep recession leading to a significant fall in output and average living standards
  • A depression is where real GDP falls by more than 10% from the peak of the cycle to the trough
  • An example of a country that has suffered a depression in recent years is Greece. National output has fallen in six successive years and real GDP is more than 25% lower than at the peak of the cycle
Recession and depression
Recovery
  • This occurs when real GDP picks up from the trough reached at the low point of the recession.
  • The state of business confidence plays a key role here. Any recovery might be subdued if businesses anticipate that it will be temporary or weak in scale.
  • A recovery might follow a deliberate attempt to stimulate demand. In the UK we have seen
  1. Cuts in interest rates – the policy interest rate fell to 0.5% in the Autumn of 2008 and they have stayed at this low level since then
  2. A rise in government borrowing
  3. A policy of quantitative easing (QE) by the Bank of England to pump more money into the banking system in a bid to increase the supply of loans – now worth more than £375 billion.
Why is GDP growth difficult to forecast?
When economists make forecasts about the future path for an economy they have to accept the inevitability of forecast errors. No macroeconomic model can hope to cope with the fluctuations and volatility of indicators such as inflation, exchange rates and global commodity prices.
  • Uncertain business confidence levels
  • Fluctuations in exchange rate
  • External events e.g. volatile oil and gas prices
  • Uncertain reactions to macro policy changes
  • Rate of business job creation hard to forecast

MEASURES TO RAISE THE PROPENSITY TO CONSUME



Measures to Raise the Propensity to Consume
In the short period due to psychological and institutional factors, it is very difficult to stimulate consumption function which possible in long-run measures to raise propensity to consume in long run are as follows:
  1. Income Redistribution:
Propensity to consume of poor people is higher than propensity to consume of rich people. Therefore, redistribution of income helps to raise propensity to consume if redistribution of income favours poor. Thus, propensity to consume can be raised transferring income from the rich to poor.
  1. Social security:
Various type of social security measures raise propensity to consume in long run. For example provision for unemployment compensation, old age allowance, widow allowance, etc., remove uncertainties in future. Therefore, tendency to save is reduced and people start to consume more.
(3)  Wage policy:
Wage rates are considered measure to raise consumption in both short-run and long-run point of view. But in short run, labour productivity can’t be increased more will harm the labours more than benefit because increased wages will increase cost which may lead to unemployment. Thus in long-run, if wage rate and productivity of labour both are increased in same way then it will tend to raise level of consumption in economy.
(4)  Easy credit facilities:
Consumption function shifts upward by the help of cheap and easy credit facilities.
(5)  Advertisement and publicity:
In modern time, advertisement and publicity, propaganda and salesmanship are effective tools to attract consumers towards commodities because these make the consumers familiar with use of product. It raises consumption function of people.
(6)  Development of infrastructures:
            Development of infrastructures like transport, communication, hydropower, etc., helps to shift consumption function upward.
(7)  Urbanization:
In urban areas people are highly influenced by the demonstration effect. This shifts the consumption function upward.

Tuesday, September 5, 2017

Benefit-Cost Analysis,

    Benefit-Cost Analysis, from the Concise Encyclopedia of Economics
    Whenever people decide whether the advantages of a particular action are likely to outweigh its drawbacks, they engage in a form of benefit-cost analysis....
    What if a change benefits some people at the expense of others? John R. Hicks, biography from the Concise Encyclopedia of Economics
    Hicks's fourth contribution was the idea of the compensation test. Before his test economists were hesitant to say that one particular outcome was preferable to another. The reason was that even a policy that benefited millions of people could hurt some people. Free trade in cars, for example, helps millions of American consumers at the expense of thousands of American workers and owners of stock in U.S. auto companies. How did an economist judge whether the help to some outweighed the hurt to others?...

In the News and Examples

    Costs and Benefits of going to the dentist: The Marginal Tooth, by Bryan Caplan on EconLog
    Every patient gets the same lecture: "If you don't floss, you'll loose your teeth. I told you this last time, and you're still not flossing!" Has it ever occurred to dentists that the marginal benefit of flossing may be less than its marginal cost?...
    Costs and Benefits of preventing crime: Crime, from the Concise Encyclopedia of Economics
    Economists approach the analysis of crime with one simple assumption—that criminals are rational people. A mugger is a mugger for the same reason I am an economist—because it is the most attractive alternative available to him. The decision to commit a crime, like any other economic decision, can be analyzed as a choice among alternative combinations of costs and benefits....
    Costs and Benefits of recycling: Recycling, from the Concise Encyclopedia of Economics
    Recycling is the process of converting waste products into reusable materials. Recycling differs from reuse, which simply means using a product again. According to the Environmental Protection Agency (EPA), about 30 percent of U.S. solid waste (i.e., the waste that is normally handled through residential and commercial garbage-collection systems) is recycled. About 15 percent is incinerated and about 55 percent goes into landfills.

    Recycling is appealing because it seems to offer a way to simultaneously reduce the amount of waste disposed in landfills and to save natural resources....
    Hidden Costs. The promoter of an idea typically plays up the benefits and plays down the costs. Economists delight in uncovering those hidden costs and often enjoy a moment of fun by taking the promoter by surprise.
    See: "What is Seen and What is Not Seen", Frédéric Bastiat(pronounced bas-tee-AH). Famous essay about what economists do, emphasizing their role in pointing out the unseen, unspoken costs behind great-sounding ideas. Examples include national security, the arts, taxes, infrastructure, international trade, jobs, credit, business, and private decisions. Also available: Audio at CommonSenseEconomics.com
      Suggested Excerpt (8 paragraphs). Hidden costs and economists' goals defined, plus an example: Does breaking a window help the economy by creating jobs for glass-repairers?

A Little History

    However hard it is to total up the costs and benefits (or pros and cons) to make individual decisions like "Should I rent this apartment?" or "Should I spend a year abroad?", it's even harder when groups are involved. Should one person decide for the group? Should it be decided by 50-50 vote, or representation? Individuals do pretty well weighing the costs and benefits for close groups, like our families, by proxy—our parents, brothers and sisters, children, and spouses. But each extension to a wider group gets harder to justify. How should the desires be balanced when considering broad groups of people with different goals and opporunities—from extended family, to high school friends, to college communities, to towns, cities, religious groups, cultural affiliations—or a whole nation or cross-national cultural group? How can we decide when there is disagreement or conflict? See the biography of Nobel Prize winner Paul Samuelson for aggregating utility functions and revealed preference.
    [Samuelson] introduced the concept of "revealed preference" in a 1938 article. His goal was to be able to tell by observing a consumer's choices whether he or she was better off after a change in prices, and indeed, Samuelson determined the circumstances under which one could tell. The consumer revealed by choices his or her preferences--hence the term "revealed preferences."

Friday, September 1, 2017

MONETARY POLICY, CONCEPT, OBJECTIVES, IMPORTANCE

MONETARY POLICY


1       Concept of Monetary Policy
            Monetary policy is one of the successful macro-economic policies. It has important role for in general economic management and growth. Monetary policy is the work out of the central bank to control over the money supply as a tool for achieving the objectives of universal economic policy. Monetary policies attempt to make different types of good quality economic activities mainly through money and credit supply as well as interest rate. Similarly, monetary policy will be more successful through the period of galloping or hyperinflation.
            The process, formulation, completion and estimate of monetary policy are calculated by the central bank under the rules and directives of government of the state as well as increase and development of an economy. Therefore, monetary policy is adopted to achieve different types of economic objectives like accelerated economic growth and progress, full service, price constancy, economic constancy etc. So monetary policy can be defined as the management of the expansion and contraction of quantity of money in movement. So we can say, monetary policy can change quantity, quality, availability and cost of money as well as rate of interest, investment, service, output, revenue etc. for the balance economic growth and development.
            According to Edward Shapiro "Monetary policy is the exercise of the central bank's control over the money supply as an instrument for achieving the objective of general economic policy". In the words of D.C. Rowen, "The monetary policy is defined as discretionary action undertaken by the authorities designed to influence (a) the supply of money, (b) cost of money or rate of interest, and (c) the availability of money". According to RP Kent monetary policy is, "The management of expansion and contraction of the volume of money in circulation for the explicit purpose of attaining a specific objective such as full employment".
            Hence, we can say monetary policy is a purposeful effort of central bank to control monetary policy and ratio of credit in an economy for achieving definite objective like economic stability and best allocation of resources. So monetary policy is measured as an important tool of the government to plan various types of economic policies. The main instruments of monetary policy and bank rate, open marketplace operation and required reserve ratio.
            Generally, there are two types of monetary policies according to economic arrangement of an economy i.e. expansionary monetary policy and concretionary monetary policy.
(A)  Concretionary Monetary Policy
            The usefulness of concretionary monetary policy is appeared through the time of hyperinflation, where prices are rising very rapidly and most of the economic variables start to fall. In such state, monetary policies are formulated to manage money supply and expenditure pattern by lowering the insist for consumption and investment some techniques for concretionary monetary prices are:
(a)  Selling the bonds, securities and treasury bills in the open market.
(b)  Increasing the discount rate.
(c)   Rising the minimum required reserve ratio.

(A)  Expansionary Monetary Policy
            The monetary policy, which normally expands money supply and credit in an economy are called expansionary monetary policy. Usually, to increase various economic activities in increasing countries such as trade, commerce, industry and infrastructure development; the expansionary monetary policies are applied some techniques for expansionary monetary policy are:
(a)  buy of bonds and funds bills in open market.
(b)  Lowering the diminution rate or bank rate.
(c)  Lowering the requisite reserve ratio.

            Hence, the monetary policy used by the central bank to fulfill the objective of country's economic policy which is related to supply of money, credit creation, interest rate, exchange rate etc.

2       Objectives of Monetary Policy
            Monetary policy is one of the great tools to stabilize the economic systems. It contains the following objectives:
(i)   Price constancy: The most important objective of monetary policy is to establish internal price stability. Stable price does not means that the average of prices on the general price level should not be allowed to fluctuate beyond certain minimum limit. Price instability creates great disturbances in the economy and helps to create inflation or deflation. Both are economically disturbing and socially undesirable. Both can create problems of production and distribution.
            Thus to establish price stability central bank should properly control the quantity of money and credit. So, the monetary policies are designed by central bank through by changing open market operation, bank rate and minimum required ratio. During the period of inflation, government issues different types securities and the selling of securities in open market absorbs bills and excess money. Similarly, central bank increases bank rate and minimum required ratio to control the problem of inflation.
(ii)  Attain complete service: joblessness is the cancer of an economy. Until the joblessness remains the same, economy cannot progress. joblessness is associated with low investment. Monetary policy can help the economy to achieve full employment through the increment of investment. Unemployment is mainly due to deficiency of investment. The main task of monetary policy is the expansion of money provides and the reduction of interest rate to that optimum level which raises the investment, demand and equals it with full employment.
(iii) Replace rate constancy: It is a traditional objective to establish exchange rate stability, but very important objective of monetary policy. Stable exchange rate helps to create international beliefs and for the promotion of smooth trade. Fluctuations in the exchange rates adversely affects in the volume of trade, price levels, production, balance of payment, foreign investment etc.
            The objective of exchange rate stability is achieved through establishing equilibrium in the balance of payment. Monetary policy plays an important role in bringing balance of payments balance without disturbing the stable exchange rate. The modern welfare governments are more concerned with establishing internal price stability quite than maintaining exchange stability because of international monetary fund.
(iv) Accelerate profitable progress: One of the major objectives of monetary policy is to accelerate economic development. Economic development involves the increase in the productive capacity of the economy by developing additional economic resources, improving technology and exploiting new investment opportunities. For this, it is necessary to increase the rate of capital formation and investment because the levels of saving and investment are very low. Directly or indirectly monetary policy helps to increase capital formation and investment, through encouraging savings and concept of investment.
(v)  Impartiality of cash: various economists such as Robertson, Hayek and Wicksteed developed the neutrality of money. The policy of neutrality of money seeks to do away with the disturbing effect of changes in the quantity of money on important economic variables, like income, output, employment and prices. According to this policy, money supply should be neutral in such a way that money should be neutral its effects. In other words, the changes in money supply should not change the total volume of output and total transactions of goods and services in the economy.
            The policy of neutrality of money is based on the assumption that money is purely a passive factor. It functions only as a medium of exchange. The function of money is only to reproduce the relative values of goods and not to distort them. The exponents of the neutral monetary policy believed that monetary changes are the root case of all economic ills. They bring changes in the real variables such as income, output, employment and relative prices. They cause inequity between demand and supply, consumption and production.
            Thus, according to the policy of impartial money, if the money is made neutral and the money supply is kept constant, there will be no disturbance in the economic system. In such a situation, relative prices will change to the changes in the demand and supply of goods and services, economic resources will be allocated according to the wants of the society, and there will be no inflation and deflation. However, this policy is based on classical assumptions. It cannot control the economic insecurity and fluctuations in the economy.

3.      Importance/Objectives of Monetary Policy in Developing Countries
            The implication of monetary policy may be explained as follows:
            The citizen like inflation, deflation, lack of employment opportunity, investment, output income etc defines developing country as a country where different types of economical and social harms are facing. In developing countries various types of economical problems are solved through the monetary policy. Monetary policy influences most of all inexpensive variables and activities through change in money supply in circulation and rate of interest.
            So suitable monetary is formulated and implemented according to economic structure of an economy. The main importance of monetary policy is developing countries are summarized on following points.
(i)   Progress Role: Monetary policy plays a significant role in developing countries in accelerating economic development by influencing the money supply and rate of interest. Monetary policy is able to create hearten towards investment by the help of scheming inflation and deflation. Similarly, correction of balance of payment plays an important role for over all economic progress. That's why monetary policy is able to run about development activities through by changing bank rate and minimum required ratio.
(ii)  Stepping up to Economic progress: In developing countries, the monetary policy should aim at promoting economic development. The monetary policy can play a vital role in acceleration to economic development. It influences the supply and uses of credit. Controlling inflation and maintaining equilibrium balance of payment.
(iii) Progress of Banking and Financial organizations: One of the main functions of central bank or primary aim of monetary policy is to establish more banks and financial institutions. Underdeveloped countries lack these facilities. These facilities will help in increasing banking habit, mobilizing voluntary savings of the people, channel zing them into productive uses and raising the rate of capital formation.
(iv) Debt organization: In the developing economy, debt management is one of the main functions of monetary policy. The tools under the aims of debt management are deciding correct timing and issuing of government bonds, stabilizing their prices and minimizing the cost of servicing the public debt. These tools collect the means and sources of economic development. Monetary policy helps it in goal specific way.
(v)  Facilitate to manage price increases: Monetary policy is an effective measure to control inflation. It plays a significant role in checking inflation. Increase in government expenditure on developmental schemes increase aggregate demand but collective supply of consumer's goods does not increase in the same time. This increases the price level. The monetary policy controls inflationary tendencies by growing saving, checking expansion of credit by banking system and hopeless deficit financing by the government through tightening monetary policy.
(vi) Help to accurate the unfavorable balance of payment: Monetary policy in the form of interest rate policy plays as important role in corrects the balance of payments deficit. In the developing countries like Nepal, there is serious balance of payment difficulties to fulfill the planned targets of development. To develop infrastructure' such as power, irrigation, transport, etc. and directly productive activities like iron, steel, chemicals, electrical, fertilizers, etc., developing countries have to import capita] equipment, machinery, raw materials, spares and components thereby raising their imports. The exports are almost stagnant. They are high priced due to inflation. As results, an imbalance is created between imports and exports, which lead to misbalance in the balance of payments. Monetary policy can help in decreasing the gap balance of payments deficit through high rate of interest. The high rate of interest attracts the inflow of the foreign investments and help in bridging the balance of payment gap.
(vii) Reduction of Economic Inequality: In an underdeveloped economy, there is wide disparity of income and wealth and absence of an integrated interest rate structure. Monetary policy can play a significant role to maintain equal distribution of income and wealth and a suitable rate of interest rate. The central bank should take effective steps that benefit the poor and to integrate the interest rate structure of the economy. For this, low rate of interest should be fixed for the poor and small farmers, and entrepreneurs and subsidy may be given for them. A suitable interest rate structure encourages savings and investment in economy and discourages unproductive loans and speculative.

4.      Expansionary Monetary Policy to manage Recession or Depression
            When the economy is faced with recession or involuntary cyclical unemployment, which comes due to fall in aggregate demand, the central bank intervenes to cure such a situation. Central bank takes steps to expand the money supply in the economy and lower the rate of interest with a view to increase the aggregate demand that will help in stimulating the economy. The following three monetary policy measures are adopted as a part of an expansionary monetary policy to measures are adopted to cure recession and to establish the equilibrium of national increase at full employment level of output.
(i)   Release marketplace process: The central bank undertakes open market operations and buys securities in the open market. Buying to securities by the central bank, from the public, chiefly from commercial banks will lead to the increase in reserves of the banks or amount of currency with the general public. With greater reserves, commercial banks can issue more credit to the investors and businessmen for undertaking more investment. More private investment will cause aggregate demand curve to shift upward. Thus buying of securities will have an expansionary effect.
(ii)  Reduce in Bank Rate: The Central Bank may lower the bank rate or what is also called discount rate, which is the rate of interest charged by the central bank of country on its loans to commercial banks. At a lower bank rate, the commercial banks will be induced to borrow more from the central bank and will be able to issue more credit at the lower rate of interest to businessmen and investors. This will not only make credit cheaper but also increase the availability of credit or money supply in the economy. The expansion in credit or money supply will increase the investment demand, which will tend to raise aggregate output and income.
(iii) Decrease of Cash Reserve Ratio (CRR): Thirdly, the central bank may reduce the Cash Reserve Ratio (CRR) to be kept by the commercial banks. In countries like India, this is a more effective and direct way of expanding credit and increasing money supply in the economy by the central bank. With lower reserve requirements, a large amount of funds is released for providing loans to businessmen and investors. As a result, credit expands and investment increases in the economy, which has an expansionary effect on output and employment.

5       Contraction Monetary Policy to manage Inflation
            When aggregate demands rises sharply due to large consumption and investment expenditure or more importantly, due to the large increase in government expenditure relative to its revenue resulting in huge budge deficits, a demand-pull inflation occurs in the economy. Besides, when there is too much creation of money for one reason or the other, it generates inflationary pressures in the economy. The following monetary measures, which constitute tight money policy, are generally adopted to control inflation:
(i)   Promotion rule Securities: The Central Bank sells the Government securities to the banks, other depository institutions and the general public through open market operations. This action will reduce the reserves with the banks and liquid funds with the general public. With less reserve with the banks, their lending ability will be reduced. Therefore, they will have to reduce their demand deposits by refraining from giving new loans as old loans are paid back. As a result, money supply in the economy will shrink.
(ii)  Add to Bank Rate: The bank rate may also be raised which will discourage the banks to take loans from the central bank. This will tend to reduce their liquidity and also induce them to raise their own lending rates. Thus this will reduce the availability of credit and also raise its cost. This will lead to the reduction in investment spending and help in reducing inflationary pressures.
(iii) Adapting Anti-inflationary actions: The most important anti-inflationary measures are the raising of statutory Cash Reserve Ratio (CRR). To meet the new higher reserve requirements, banks will reduce their lending. This will have a direct effect on the contraction of money supply in the economy and help in controlling demand pull inflation. Besides Cash Reserve Ratio (CRR), the Statutory Liquidity Ratio (SLR) can also be increased through which excess reserves of the banks are mopped up resulting in contraction in credit.
(iv) Use of Qualitative acknowledgment manage calculate: Fourthly, an important anti-inflationary measure is the use of qualitative credit control, namely, rising of minimum margins for obtaining loans from banks against the stocks of sensitive commodities such as food grains, oilseeds, cotton, sugar, vegetables oil. As a result of this measure, businessmen themselves will have to finance to a greater extent the holding of inventories of goods and will be able to get less credit from banks.




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