LEGAL & BUSINESS ENVIRONMENT

Class activity: Dated: 30.04.2020

29) Explain the objectives of Fiscal Policy?

Ans:-
Fiscal policy must be designed to be performed in two ways-by expanding investment in public and
private enterprises and by diverting resources from socially less desirable to more desirable
investment channels.

The objective of fiscal policy is to maintain the condition of full employment, economic stability and
to stabilize the rate of growth.

For an under-developed economy, the main purpose of fiscal policy is to accelerate the rate of
capital formation and investment.

Therefore, fiscal policy in under-developed countries has a different objective to that of advanced
countries.

Generally following are the objectives of a fiscal policy in a developing economy:

1. Full employment

2. Price stability

3. Accelerating the rate of economic development

4. Optimum allocation of resources

5. Equitable distribution of income and wealth

6. Economic stability

7. Capital formation and growth.

30) Explain the objectives of Monetary Policy?

Ans:-
Objectives of Monetary Policy:
The goals of monetary policy refer to its objectives such as reasonable price stability, high
employment and faster rate of economic growth. The targets of monetary policy refer to such
variables as the supply of bank credit, interest rate and the supply of money.

Four most important objectives of monetary policy are the following :

1. Stabilising the Business Cycle:
Monetary policy has an important effect on both actual GDP and potential GDP. Industrially
advanced countries rely on monetary policy to stabilise the economy by controlling business. But it
becomes impotent in deep recessions.

2. Reasonable Price Stability:

Price stability is perhaps the most important goal which can be pursued most effectively by using
monetary policy. In a developing country like India the acceleration of investment activity in the face
of a fall in agricultural output creates excessive pressure on prices. The food inflation in India is a
proof of this. In such a situation, monetary policy has much to contribute to short-run price stability.

3. Faster Economic Growth:

Monetary policy can promote faster economic growth by making credit cheaper and more readily
available. Industry and agriculture require two types of credit—short-term credit to meet working
capital needs and long-term credit to meet fixed capital needs.

4. Exchange Rate Stability:

In an ‘open economy’—that is, one whose borders are open to goods, services, and financial flows—
the exchange-rate system is also a central part of monetary policy. In order to prevent large
depreciation or appreciation of the rupee in terms of the US dollar and other foreign currencies
under the present system of floating exchange rate the central bank has to adopt suitable monetary
measures. India by the Reserve

31) Write a brief note on instruments of monetary policy?

Ans:-
Instruments of Monetary Policy:
The instruments of monetary policy are of two types: first, quantitative, general or indirect; and
second, qualitative, selective or direct. They affect the level of aggregate demand through the supply
of money, cost of money and availability of credit. Of the two types of instruments, the first category
includes bank rate variations, open market operations and changing reserve requirements. They are
meant to regulate the overall level of credit in the economy through commercial banks. The
selective credit controls aim at controlling specific types of credit. They include changing margin
requirements and regulation of consumer credit. We discuss them as under:

 Bank Rate Policy:

The bank rate is the minimum lending rate of the central bank at which it rediscounts first class bills
of exchange and government securities held by the commercial banks. When the central bank finds
that inflationary pressures have started emerging within the economy, it raises the bank rate.
Borrowing from the central bank becomes costly and commercial banks borrow less from it.

 Open Market Operations:

Open market operations refer to sale and purchase of securities in the money market by the central
bank. When prices are rising and there is need to control them, the central bank sells securities. The
reserves of commercial banks are reduced and they are not in a position to lend more to the
business community.

32) Give the limitations of monetary policy

Ans:-
Monetary policy alone cannot generate full employment and promote economic stability. More
measures, unless supported by other government measures, may not even be able to achieve a
specific price level, leave alone the stabilization of economic activity. Prof. Halm remarks. “It is highly
doubtful that even the best conceivable monetary policy could eliminate cyclical fluctuations of a
money economy. Such a policy would not only have to prevent disturbing influences from the
monetary side itself but also to counter-balance disturbing influences from other sources.
Experiences in recent years have at least shown that general fluctuations of business are continuing
and that the instruments at the disposal of monetary authorities are certainly not capable, at least as
they are now being used, of extricating the economy from conditions of under-employment and of
leading it into permanent prosperity. The cyclical fluctuation of the money economy itself is partly
the reason for the failure of the instruments of monetary policy to work more satisfactorily.”

Prior to 1920 or so, when quantity theory of money held away, there was little doubt as to the
efficacy of monetary policy. Monetary policy, however, failed to control the unheard of hyper-
inflation of Germany. It could not generate a revival of business activity during the depression of
1929-33. It was in this context that Keynes openly questioned the efficacy of monetary policy. He
advocated fiscal policy to bring about economic stability and full employment