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Discuss the objectives of monetary policy in a developing economy.

Posted by Ripon Abu Hasnat on Thursday, December 3, 2015 | 0 comments

1. ECONOMIC GROWTH: By adopting suitable monetary policy, a government tries to achieve economic development. As a result of economic development , there will be proper utilization of natural & human resources, more capital formation, more employment , increase in national & per capita income, increase in income along with an increase in the standard of living.

2. EXCHANGE STABILITY: The traditional objective of monetary policy has been the achievement of stable exchange rates. Balance of payment creates fluctuation in the foreign exchange rates. The exchange rates, therefore, has to be adjusted to achieve the favorable balance of payments.

3. PRICE STABLITY: Stable prices improve public confidence, promote business activity & ensure equal distribution of income & wealth. As a result, it will enhance the prosperity and welfare in the community. But a determination of a satisfactory price level is a difficult task.

4. FULL EMPLOYMENT: To attain this objective, it is necessary to increase production and demand. During the boom period the position is automatically achieved as there is rapid increase in demand and thereby production is also increased. On the contrary, during depression there is low production because of low demand and wide unemployment. Hence, the objective of monetary policy is to check rising unemployment during depression period.

5. CREDIT CONTROL: To control credit government uses the tools like; Bank Rate Policy, Open Market Operation, Statutory Liquidity Ratio (SLR) & Cash Reserve Ratio (CRR).

6. REDUCTION IN EQUALITY & WEALTH: Inequality in income and wealth due to right of private property and law of inheritance is the common feature of capitalist and mixed economy. As a result, the society is divided into two classes, rich and poor. Poor class is generally exploited by rich class. The objective of monetary policy is to reduce the inequalities of income and wealth.

7. CREATION & EXPANSION OF FINANCIAL INSTITUTION: A major objective of monetary policy in a developing country is to speed up the process of economic development by improving the currency to provide large credit facilities and to mobilize savings for productive purposes. The monetary authority can help in establishment and expansion of banks and institutions in urban and rural areas.