21243453 Economic Stability 12

8/6/2019 21243453 Economic Stability 12

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By

RISHI R. SINGHAJAY K. MISHRA

YUVRAJ SINGHAMAR K.


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`Economic stability refers to an

absence ofexcessivefluctuations

in themacroeconomy.


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An economy with fairly constant

output growth and low and stable

inflation would be consideredeconomically stable.


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That is when is Inflationsis at the

low and stablelevel and

the Output growth is constant then

theeconomy issaid to bestable.,

that issteady.


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`An economy with frequent largerecession,

a pronounced business cycle, very high or

variableinflation, orfrequent financial crisis

would be considered economically

unstable.


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When thereis

largerecessions,

theeconomicstability is

affected and it

turns Unstable.


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The majorpoint in recessionsis that, it directlyaffects theexisting Engineers.

The Diagram explain very well.


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` When the

business cycle

is pronounced

then thestability is

altered.


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` When the

inflation isvery

high or

Variable thenthere an

alteration in the

Stability.


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` Financial

Crisis are also

the major

reasonsforEconomic

stability.


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When there are no alterations in the factors like

` Macroeconomy

` Inflations

` Output growth` Recessions

` Business cycle

` Financial crisis

Then there will be a Stable Economy.


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`A central Banks changing of the Money Supply

` to influence interest rate and assist the

economy in achieving price stability, full

employment, and economic growth.` Monetary rule (suggested by monetarism): As

traditionally formulated, the rule says that the

money supply should be expanded each year

at the same annual rate as the potential rate ofgrowth of the real GDP; the supply of money

should be increased steadily between 3 to 5

percent peryear.


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Full Employment:- one of the objectives of monetary

policy is attain full employment. It is not only because

unemployment leads to wastage of potential output.

But also because of the loss of social standing andself- respect. It also breeds poverty.


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Pricestability :- Anotherobjective ofmonetary

policy is to stabilize the pricelevel. Both , rising

and falling prices are bad as the bring

unnecessary loss to some and undue advantageto others. They are associated with business

cycles. So a policy ofpricestability keeps the

value ofmoney stable, eliminates cyclical

fluctuations. Bringseconomic stability, helpsinreducing inequalities ofincome and wealth,

securessocial justice and promoteseconomic

welfare


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Economic growth :-monetary policy can be imposed to

influence the rapid economic growth. Economic growth

is defined as the process whereby the real per capita

income of a country increases over a long period oftime it is measured by the increase in the amount of

goods and services produced in a country. A growing

economy produces more goods and services in each

successive time period. Thus, growth occurs when aneconomys thus, economic growth implies raising the

standard of living of the people, and reducing

inequalities of inequalities of income distribution.


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` Balance of payments:- another objective of monetary

policy since the 1950s has been to maintain

equilibrium in the balance of payments. It is also

recognized that deficit in the balance of payments willretard the attainment of other objectives. This is

because a deficit in the balance of payment leads to a

sizeable outflow of gold,


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` Monetary policy plays an important role in increasing

the growth rate of the economy by influencing the cost

and availability of credit by controlling inflation and

maintaining equilibrium in the balance of payments.


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` To controlinflationary pressures, monetary policy

requires theuse ofboth quantitative and

qualitative methods ofcredit control. The open

market operations are not successfulin controllinginflation in underdeveloped countries as the bill

market issmall and undeveloped.


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` The use of variable reserve ratio is more effectivethan open market operations and bank rate policyin LDCs. Since the market for securities is very

small, open market operations are not successful.but a rise or fall in the variable reserve ratio bythe central bank reduces or increases the cashavailable with the commercial banks withoutaffecting adversely the prices of securities.


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` Monetary policy is important for achieving pricestability. It brings a proper adjustment between thedemand for and supply of money. An imbalancebetween the two will be reflected in the price level.

A shortage of money supply will hamper the growthwhile an excess will lead to inflation. As theeconomy develops the demand for money increasesdue to the gradual monetization of the non-monetized sector, and the increase in agricultural

and industrial production. This will increase thedemand for transactions and speculative motives.So the money supply will have to be raised morethan proportionate to the demand for money, toavoid inflation.


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` Interest rate policy plays an important role in bridgingthe BOP deficit. Underdeveloped countries developserious balance of payments. To establish infrastructurelike power, irrigation, transport etc and directlyproductive activities like iron and steel, chemical,electricals, fertilizers , etc, underdeveloped countrieshave to import capital equipment, machinery, rawmaterials, spares and components thereby raising their

imports,


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` There are four ways in which the central bank

affect the money supply . These are monetary

policy tools:

1. Open market operations .

2. Reserve requirements.

3. Discount rate .

4. Selective credit control .


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` The Process ofbuying government bonds from,

and selling them to, commercial banks and

general public is called Open market

operations.


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` It is the interest rate at which the central bank

will lend funds to commercial banks whose

reserves are temporarily below the required

level.

` These loans help banks to meet their reserve

requirements when open market sales by the

central bank cause a sudden fall ofcommercialbanks reserves.


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`A fall in the discount rate encourages more

borrowing by commercial banks and that

increases the reserves of the banks , which inturn, increases loans and deposits in the

banking system.HThis will lead to an increase the money supply.

` When the discount rate increases,

commercial banks are likely to increase their

reserves so as to avoid the costs associated

with an unexpected cash drain.

` Changes in the discount rate provide a signal

ofthe central bank intention.


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` Examples: margin requirements, mortgagecontrols, and maximum interest rates.

` Margin Requirement:

` It is the fraction of the price of stock that must

be put in cash by the purchaser and thebalance can be borrowed from the brokeragefirm.

` If the central bank would like to increase themoney supply, it will reduce the marginrequirement and the opposite is also true.


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21243453 Economic Stability 12