Public Finance, Monetary Policies, Inflation & Control Mechanism, Repo Rate, Reverse Repo Rate, CRR & SLR.- For RAS RTS Exam

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<–2/”>a >Table of Content:-

  1. PUBLIC FINANCE
  2. Monetary Policies
  3. Inflation & Control Mechanism,
  4. Repo rate
  5. Reverse Repo Rate
  6. CRR
  7. SLR.

Public Finance

Public finance is the study of the role of the government in the economy. It is the branch of economics which assesses the government revenue and government expenditure of the public authorities and the adjustment of one or the other to achieve desirable effects and avoid undesirable ones.

It includes the study of :-

Fiscal policy relates to raising and expenditure of Money in quantitative and qualitative manner.Fiscal policy is the use of government spending and Taxation to influence the economy. Governments typically use fiscal policy to promote strong and sustainable Growth and reduce POVERTY. The role and objectives of fiscal policy gained prominence during the recent global economic crisis, when governments stepped in to support financial systems, jump-start growth, and mitigate the impact of the crisis on vulnerable groups.

pfHistorically, the prominence of fiscal policy as a policy tool has waxed and waned. Before 1930, an approach of limited government, or laissez-faire, prevailed. With the stock market crash and the Great Depression, policymakers pushed for governments to play a more proactive role in the economy. More recently, countries had scaled back the size and function of government—with markets taking on an enhanced role in the allocation of goods and Services—but when the global financial crisis threatened worldwide Recession, many countries returned to a more active fiscal policy.

How does fiscal policy work?

When policymakers seek to influence the economy, they have two main tools at their disposal—Monetary Policy and fiscal policy. Central banks indirectly target activity by influencing the Money Supply through adjustments to interest rates, bank reserve requirements, and the purchase and sale of Government Securities and Foreign Exchange. Governments influence the economy by changing the level and Types of Taxes, the extent and composition of spending, and the degree and form of borrowing.

Deficit financing, practice in which a government spends more money than it receives as revenue, the difference being made up by borrowing or minting new funds.

Fiscal consolidation is a term that is used to describe the creation of strategies that are aimed at minimizing deficits while also curtailing the accumulation of more debt. The term is most commonly employed when referring to efforts of a local or national government to lower the level of debt carried by the jurisdiction, but can also be applied to the efforts of businesses or even households to reduce debt while simultaneously limiting the generation of new debt obligations. From this perspective, the goal of fiscal consolidation in any setting is to improve financial stability by creating a more desirable financial position.

The public debt is defined as how much a country owes to lenders outside of itself. These can include individuals, businesses and even other governments.public debt is the accumulation of annual budget deficits. It’s the result of years of government leaders spending more than they take in via tax revenues.

 

Monetary Policies

Monetary policy is the process by which the monetary authority of a country controls the Supply of Money, often targeting an inflation rate or interest rate to ensure price stability and general trust in the currency.
Objectives of Monetary Policies are:-
  •  Accelerated growth of the economy
  • Balancing saving and investments
  • Exchange rate stabilization
  • Price stability
  • EMPLOYMENT generation

Monetary Policy could be expansionary or contractionary;  Expansionary policy would increase the total money supply in the economy while contractionary policy would decrease the money supply in the economy.

RBI issues the Bi-Monthly monetary policy statement. The tools available with RBI to achieve the targets of monetary policy are:-

  • Bank rates
  • Reserve Ratios
  • Open Market Operations
  • Intervention in forex market
  • Moral suasion

 

 

Repo Rate- Repo rate is the rate at which the central bank of a country (RBI in case of India) lends money to Commercial Banks in the event of any shortfall of funds. In the event of inflation, central banks increase repo rate as this acts as a disincentive for banks to borrow from the central bank. This ultimately reduces the money supply in the economy and thus helps in arresting inflation.

Reverse Repo Rate is the rate at which RBI borrows money from the commercial banks.An increase in the reverse repo rate will decrease the money supply and vice-versa, other things remaining constant. An increase in reverse repo rate means that commercial banks will get more incentives to park their funds with the RBI, thereby decreasing the supply of money in the market.

Cash Reserve Ratio (CRR) is a specified minimum fraction of the total deposits of customers, which commercial banks have to hold as reserves either in cash or as deposits with the central bank. CRR is set according to the guidelines of the central bank of a country.The amount specified as the CRR is held in cash and cash equivalents, is stored in bank vaults or parked with the Reserve Bank of India. The aim here is to ensure that banks do not run out of cash to meet the payment demands of their depositors. CRR is a crucial monetary policy tool and is used for controlling money supply in an economy.

CRR specifications give greater control to the central bank over money supply. Commercial banks have to hold only some specified part of the total deposits as reserves. This is called fractional reserve Banking.

Statutory liquidity ratio (SLR) is the Indian government term for reserve requirement that the commercial banks in India require to maintain in the form of gold, government approved securities before providing credit to the customers.its the ratio of liquid assets to net demand and time liabilities.Apart from Cash Reserve Ratio (CRR), banks have to maintain a stipulated proportion of their net demand and time liabilities in the form of liquid assets like cash, gold and unencumbered securities. Treasury Bills, dated securities issued under market borrowing programme and market stabilisation schemes (MSS), etc also form part of the SLR. Banks have to report to the RBI every alternate Friday their SLR maintenance, and pay penalties for failing to maintain SLR as mandated.

Inflation & Control Mechanism

inflation is a sustained increase in the general price level of goods and services in an economy over a period of time. When the price level rises, each unit of currency buys fewer goods and services.It is the Percentage change in the value of the Wholesale Price Index (WPI) on a year-on year basis. It effectively measures the change in the prices of a basket of goods and services in a year. In India, inflation is calculated by taking the WPI as base.

Formula for calculating Inflation=

(WPI in month of current year-WPI in same month of previous year)
————————————————————————————– X 100
WPI in same month of previous year

Inflation occurs due to an imbalance between demand and supply of money, changes in production and distribution cost or increase in taxes on products. When economy experiences inflation, i.e. when the price level of goods and services rises, the value of currency reduces. This means now each unit of currency buys fewer goods and services.

It has its worst impact on consumers. High prices of day-to-day goods make it difficult for consumers to afford even the basic commodities in life. This leaves them with no choice but to ask for higher incomes. Hence the government tries to keep inflation under control.

Contrary to its negative effects, a moderate level of inflation characterizes a good economy. An inflation rate of 2 or 3% is beneficial for an economy as it encourages people to buy more and borrow more, because during times of lower inflation, the level of interest rate also remains low. Hence the government as well as the central bank always strive to achieve a limited level of inflation.

Various measures of Inflation are:-

There are following types on Inflation based on their causes:-

  • Demand pull inflation
  • cost push inflation
  • structural inflation
  • speculation
  • cartelization
  • hoarding

Various control measures to curb rising inflation are:-

  • Fiscal measures like reduction in indirect taxes
  • Dual pricing
  • Monetary measures
  • Supply side measures like importing the shortage goods to meet the demand
  • Administrative measures to curb hoarding, Cratelization.

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Public finance is the study of the role of government in the economy. It deals with the government’s role in raising revenue, spending money, and managing its debt. Public finance is important because it affects the lives of everyone in a country. The government’s decisions about how to raise revenue and spend money can have a big impact on the economy.

Public revenue is the money that the government collects from taxes, fees, and other sources. Public expenditure is the money that the government spends on goods and services, such as Education, healthcare, and Infrastructure-2/”>INFRASTRUCTURE. Public debt is the total amount of money that the government owes.

A budget deficit is when the government spends more money than it collects in revenue. A Fiscal Deficit is when the government’s total debt is greater than its total revenue.

Monetary policy is the actions that a central bank takes to control the money supply and interest rates. Open market operations are when a central bank buys or sells Bonds/”>Government Bonds in order to change the money supply. The DISCOUNT rate is the interest rate that a central bank charges banks for loans. The reserve requirement is the percentage of deposits that banks must keep on hand. The liquidity ratio is the percentage of assets that banks must hold in liquid form, such as cash or government bonds.

Inflation is a general increase in prices. Demand-pull inflation is caused by an increase in Aggregate Demand. Cost-push inflation is caused by an increase in costs of production. Built-in inflation is caused by expectations of future inflation.

Monetary policy is one way that governments can control inflation. Monetary policy is the actions that a central bank takes to control the money supply and interest rates. The central bank can increase or decrease the money supply by buying or selling government bonds. The central bank can also increase or decrease interest rates by changing the discount rate or the reserve requirement.

Fiscal policy is another way that governments can control inflation. Fiscal policy is the use of government spending and taxation to influence the economy. The government can increase or decrease spending, or it can increase or decrease taxes.

Supply-side policy is a type of economic policy that focuses on increasing the supply of goods and services. Supply-side policies can include tax cuts, deregulation, and infrastructure Investment.

The repo rate is the interest rate that the central bank charges banks for overnight loans. The reverse repo rate is the interest rate that banks pay the central bank for overnight deposits. The CRR is the percentage of deposits that banks must keep on hand. The SLR is the percentage of assets that banks must hold in liquid form, such as cash or government bonds.

Public finance is a complex and important topic. It is important to understand the different aspects of public finance in order to make informed decisions about the role of government in the economy.

Public Finance

  1. What is public finance?
    Public finance is the study of the government’s role in the economy. It includes the study of government revenues, expenditures, and debt.

  2. What are the different Types of government revenues?
    The different types of government revenues include taxes, fees, and fines.

  3. What are the different types of government expenditures?
    The different types of government expenditures include Transfer Payments, subsidies, and public goods.

  4. What is the national debt?
    The national debt is the total amount of money that the government owes to its creditors.

  5. What are the different types of monetary policies?
    The different types of monetary policies include expansionary monetary policy, contractionary monetary policy, and neutral monetary policy.

Inflation & Control Mechanism

  1. What is Inflation?
    Inflation is a general increase in prices and fall in the purchasing value of money.

  2. What are the different types of inflation?
    The different types of inflation include demand-pull inflation, cost-push inflation, and built-in inflation.

  3. What are the different causes of inflation?
    The different causes of inflation include an increase in the money supply, an increase in aggregate demand, and a decrease in Aggregate Supply.

  4. What are the different effects of inflation?
    The different effects of inflation include a decrease in the purchasing power of money, a redistribution of income, and a decrease in economic efficiency.

  5. What are the different ways to control inflation?
    The different ways to control inflation include monetary policy, fiscal policy, and wage and price controls.

Repo Rate, Reverse Repo Rate, CRR & SLR

  1. What is the repo rate?
    The repo rate is the interest rate at which the central bank lends money to commercial banks.

  2. What is the reverse repo rate?
    The reverse repo rate is the interest rate at which commercial banks lend money to the central bank.

  3. What is the CRR?
    The CRR is the percentage of deposits that commercial banks are required to keep with the central bank.

  4. What is the SLR?
    The SLR is the percentage of deposits that commercial banks are required to invest in government securities.

  5. What are the effects of changes in the repo rate and reverse repo rate?
    Changes in the repo rate and reverse repo rate have a direct impact on the cost of borrowing for commercial banks. This, in turn, affects the interest rates that commercial banks charge their customers. Changes in the repo rate and reverse repo rate can also affect the money supply in the economy.

  6. What are the effects of changes in the CRR and SLR?
    Changes in the CRR and SLR have a direct impact on the amount of money that commercial banks have available to lend. This, in turn, affects the availability of credit in the economy. Changes in the CRR and SLR can also affect the interest rates that commercial banks charge their customers.

  1. The main objective of the monetary policy is to:
    (a) Control inflation
    (b) Control interest rates
    (c) Control exchange rates
    (d) Control money supply

  2. The Reserve Bank of India (RBI) uses the following instruments to implement monetary policy:
    (a) Open market operations
    (b) Cash reserve ratio (CRR)
    (c) Statutory liquidity ratio (SLR)
    (d) All of the above

  3. Open market operations refer to:
    (a) The purchase and sale of government securities by the RBI
    (b) The change in the Bank Rate by the RBI
    (c) The change in the CRR by the RBI
    (d) The change in the SLR by the RBI

  4. The CRR is the percentage of deposits that banks are required to keep with the RBI.
    (a) True
    (b) False

  5. The SLR is the percentage of deposits that banks are required to invest in government securities.
    (a) True
    (b) False

  6. The repo rate is the rate at which the RBI lends money to banks.
    (a) True
    (b) False

  7. The reverse repo rate is the rate at which banks lend money to the RBI.
    (a) True
    (b) False

  8. When the RBI increases the repo rate, it makes it more expensive for banks to borrow money.
    (a) True
    (b) False

  9. When the RBI increases the reverse repo rate, it makes it more attractive for banks to lend money to the RBI.
    (a) True
    (b) False

  10. When the RBI increases the CRR, it reduces the amount of money that banks have available to lend.
    (a) True
    (b) False

  11. When the RBI increases the SLR, it reduces the amount of money that banks have available to lend.
    (a) True
    (b) False

  12. The main objective of the fiscal policy is to:
    (a) Control inflation
    (b) Control interest rates
    (c) Control exchange rates
    (d) Control government spending and taxation

  13. The government uses the following instruments to implement fiscal policy:
    (a) Taxes
    (b) Spending
    (c) Borrowing
    (d) All of the above

  14. When the government increases taxes, it reduces the amount of money that people have available to spend.
    (a) True
    (b) False

  15. When the government increases spending, it injects more money into the economy.
    (a) True
    (b) False

  16. When the government borrows money, it increases the national debt.
    (a) True
    (b) False

  17. Inflation is a general increase in prices over time.
    (a) True
    (b) False

  18. The main Cause of Inflation is an increase in the money supply.
    (a) True
    (b) False

  19. The government can control inflation by using monetary policy and fiscal policy.
    (a) True
    (b) False

  20. The main objective of the inflation control mechanism is to:
    (a) Keep inflation low and stable
    (b) Keep inflation high and volatile
    (c) Keep inflation negative
    (d) Keep inflation at zero

Table of Contents

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