monetary policy & economic indicators

MONETARY POLICYMONETARY POLICY&&

ECONOMICECONOMIC

INDICATORSINDICATORS

MONETARY POLICYMONETARY POLICY

Definition of Monetary PolicyDefinition of Monetary Policy

Control of total credit and Control of total credit and money supply in the economy is money supply in the economy is called monetary policy.called monetary policy.

Explanation:Explanation:

Credit has great importance in the modern Credit has great importance in the modern economic system. For the stability of a economic system. For the stability of a country, proper control and regulation of credit country, proper control and regulation of credit is essential. If bank issues too much credit is essential. If bank issues too much credit money, it leads to inflation. On other hand money, it leads to inflation. On other hand tight control over this money may cause tight control over this money may cause depression and unemployment.depression and unemployment.

Objectives of Monetary PolicyObjectives of Monetary Policy

1.1. Full EmploymentFull Employment

2.2. Increase in investmentIncrease in investment

3.3. Price StabilityPrice Stability

4.4. Control on Inflation & Control on Inflation & DeflationDeflation

5.5. Increase in productionIncrease in production

6.6. Exchange StabilityExchange Stability

Following are objectives of monetary policy:Following are objectives of monetary policy:

1. 1. Full EmploymentFull Employment

One of the objectives of monetary One of the objectives of monetary policy is to create more opportunities of policy is to create more opportunities of employment in all sectors of economy.employment in all sectors of economy.

It helps in the maximizing utilization of It helps in the maximizing utilization of all the resources. all the resources.

2.2. Increase in InvestmentIncrease in Investment

With the help of monetary policy central With the help of monetary policy central bank tries to increase investment both bank tries to increase investment both domestic and foreign, which results in domestic and foreign, which results in economic stability. economic stability.

Monetary policy helps in creating price Monetary policy helps in creating price stability in the country by controlling stability in the country by controlling inflation and deflationinflation and deflation..

3. Price Stability3. Price Stability

Monetary policy creates economic Monetary policy creates economic stability in the country by controlling stability in the country by controlling inflation and deflation.inflation and deflation.

4. Control on Inflation & 4. Control on Inflation & DeflationDeflation

5. Increase in Production5. Increase in Production

With help of monetary policy various With help of monetary policy various productive sectors are encouraged to get productive sectors are encouraged to get loan due to which there is an increase in loan due to which there is an increase in production.production.

6. Exchange Stability6. Exchange Stability

Monetary policy helps creating exchange Monetary policy helps creating exchange stability by improving balance of stability by improving balance of payment position.payment position.

Quantitative controlQuantitative control

These include These include

Bank Rate PolicyBank Rate Policy Open Market Operations (OMO)Open Market Operations (OMO) Variations in Reserves RequirementVariations in Reserves Requirement Credit RationingCredit Rationing

Qualitative controlQualitative control

These includeThese include

Change in Margin RequirementChange in Margin Requirement Regulations of consumer s creditRegulations of consumer s credit Moral persuasionMoral persuasion PublicityPublicity Direct actionDirect action

ECONOMIC INDICATORSECONOMIC INDICATORS

Statistical data that indicate the direction of Statistical data that indicate the direction of an economy.an economy.

They are of three main types:They are of three main types:

(1) Leading indicators(1) Leading indicators

(2) Coincident indicators(2) Coincident indicators

(3) Lagging indicators(3) Lagging indicators

Explanation Explanation

Economic indicators or business indicators are Economic indicators or business indicators are markers about an economy. Future performance markers about an economy. Future performance predictions and economic performances can be predictions and economic performances can be analyzed through these indicators.analyzed through these indicators.

Examples are unemployment, Inflation (Consumer Examples are unemployment, Inflation (Consumer Price Index), Imports, Exports, GDP, stock market Price Index), Imports, Exports, GDP, stock market prices and money supply changes.prices and money supply changes.

Coincident indicatorsCoincident indicators

Indicators which change about same time and in Indicators which change about same time and in same direction with economy are called coincident same direction with economy are called coincident indicators.indicators.These provide information regarding present These provide information regarding present economic state. Coincident indicators include retail economic state. Coincident indicators include retail sales, GDP, industrial production, and personal sales, GDP, industrial production, and personal income etc.income etc.

Leading indicatorsLeading indicators

Leading indicators change before economy Leading indicators change before economy changes. Stock market returns are such indicators changes. Stock market returns are such indicators that decline before economy declines and improve that decline before economy declines and improve before economy begins to grow out of recession.before economy begins to grow out of recession.

Lagging indicatorsLagging indicators

Lagging economic indicator doesn’t change Lagging economic indicator doesn’t change direction till a few quarters after changes in direction till a few quarters after changes in economy. One example is unemployment rate economy. One example is unemployment rate which increases after 2 or 3 quarters following an which increases after 2 or 3 quarters following an economic improvement.economic improvement.