Economic policy

ECONOMIC POLICY

Economic policy refers to the actions that governments take in the economic field. Such policies are often influence by international institutions like international monetary fund or world bank.

MONETARY POLICY

Monetary policy means policy of the government to stabilize economic system, price level, monetary policy, etc with the help of monetary authority of the country (RMA).

OBJECTIVES

a.Full employment of all available resourcesb.Price Stability

c.Economic growth

a. Full employment of all available resources

A situation in which all available labor resources are being used in the most economically efficient way. Full employment embodies the highest amount of skilled and unskilled labor that could be employed within an economy at any given time.

b. Price Stability

The situation whereby the prices of goods and services offered in the marketplace either change very slowly or do not change at all. Factors affecting this include employment and inflation.

c. Economic Growth

Continuous increases in a country’s productive capacity, as measured by comparing gross national product (GNP) in a year with the GNP in the previous year.

INSTRUMENTS OF MONETARY POLICY

1.Cash Reserve Ratio2.Open market Operations

3.Bank Rate Policy

1. Cash Reserve Ratio

The percentage of a bank’s total monetary holdings that must be kept on hand in the form of actual currency. Under fractional-reserve banking, a bank may lend out any money deposited there, but must maintain on site the amount mandated by the cash reserve ratio.

2. Open Market Operations

The buying and selling of government securities by a central bank, such as the Royal Monetary of Authority in the Bhutan, in order to control the money supply.

3.Bank Rate Policy

It is same as rate of interest. Money supply can be stabilized by increasing and decreasing interest rate.

FISCAL POLICYUsually relating to taxation and government spending, with the goals of full employment, price stability, and economic growth. By changing tax laws, the government can effectively modify the amount of disposable income available to its taxpayers.

INSTRUMENTS OF FISCAL POLICY

1.Taxation2.Public Borrowing

3.Public Expenditures

1. Taxation

The compulsory payment made by the people to the government authority for the service render by the latter (government)

2. Public Borrowing

During the inflation period that is when there is excess of money supply in the economy, the government borrows excess money from the public.

3. Public Expenditures

In order to stabilize the economy, the public expenditure need to be increases and decreases.

SHIFT IN IS CURVE

IS

IS1

LM

rr1

0 Y Y

EE

National Incomes

Rate of Interest

X-axis

Y-axis

SHIFT IN LM CURVE

IS

LM

LM1

rr1

0 YY

EE

National Incomes

Rate of Interest

X-axis

Y-axis

Any Question???