Public Finance, Monetary Policies, Inflation & Control Mechanism, Repo Rate, Reverse Repo Rate, CRR & SLR.

<–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.

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Public Finance

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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
• Deficits and Deficit Financing
• Fiscal Consolidation
• Public Debt– Internal and External Debt

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.

Historically, 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.

 

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Monetary Policies

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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.

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Inflation & Control Mechanism

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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:-

• GDP Deflator
• Cost of Living Index
• Producer Price Index(PPI)
• Wholesale Price Index(WPI)
• Consumer Price Index(CPI)

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 budget, taxation, expenditure, borrowing, deficit, and debt.

The government’s budget is a plan for how it will spend and raise money in the coming year. The budget is prepared by the Ministry of Finance and is approved by the Parliament. The budget includes estimates of revenue from taxes, fees, and other sources, as well as estimates of expenditure on goods and services, transfers to individuals and businesses, and capital Investment.

Taxation is the main source of revenue for the government. Taxes are levied on income, profits, goods and services, and property. The government uses taxes to finance its activities, redistribute income, and regulate the economy.

Expenditure is the amount of money that the government spends in a given year. Expenditure includes spending on goods and services, transfers to individuals and businesses, and capital investment. The government spends money to provide public goods and services, such as Education, healthcare, and Infrastructure-2/”>INFRASTRUCTURE. It also spends money to transfer income to the poor and to support businesses.

Borrowing is the act of taking out a loan from a lender. The government borrows money to finance its activities when it does not have enough revenue from taxes. The government borrows money by issuing Bonds, which are loans that are sold to investors.

Deficit is the amount of money that the government spends in a given year that is more than the amount of money that it raises from taxes. The government can finance a deficit by borrowing money.

Debt is the total amount of money that the government owes. The government’s debt includes both the amount of money that it has borrowed and the amount of money that it owes to its employees and suppliers.

Monetary policy is the use of interest rates, reserve requirements, and open market operations to control the money supply and inflation. The central bank, which is the government’s bank, is responsible for implementing monetary policy.

Interest rates are the prices that banks charge each other for loans. The central bank can influence interest rates by buying and selling government securities. When the central bank buys government securities, it injects money into the economy and lowers interest rates. When the central bank sells government securities, it takes money out of the economy and raises interest rates.

Reserve requirements are the percentage of deposits that banks are required to hold as cash in their vaults or on deposit with the central bank. The central bank can influence the money supply by changing reserve requirements. When the central bank lowers reserve requirements, banks have more money to lend, which increases the money supply. When the central bank raises reserve requirements, banks have less money to lend, which decreases the money supply.

Open market operations are the buying and selling of government securities by the central bank. The central bank uses open market operations to influence the money supply. When the central bank buys government securities, it injects money into the economy and increases the money supply. When the central bank sells government securities, it takes money out of the economy and decreases the money supply.

Inflation is a general increase in prices over time. Inflation can be caused by a number of factors, including an increase in the money supply, an increase in demand, or a decrease in supply. Inflation can have a number of negative effects on the economy, including reducing the purchasing power of consumers, making it more difficult for businesses to plan and invest, and increasing the risk of financial instability.

There are a number of policies that can be used to control inflation, including monetary policy, fiscal policy, supply-side policies, and incomes policy. Monetary policy is the use of interest rates, reserve requirements, and open market operations to control the money supply and inflation. Fiscal policy is the use of government spending and taxation to control the economy. Supply-side policies are policies that are designed to increase the supply of goods and services in the economy. Incomes policy is a policy that is designed to control the growth of wages and prices.

The repo rate is the interest rate at which the central bank lends money to commercial banks. The reverse repo rate is the interest rate at which the central bank borrows money from commercial banks. The CRR is the percentage of deposits that banks are required to hold as cash in their vaults or on deposit with the central bank. The SLR is the percentage of deposits that banks are required to invest in government securities.

Public Finance

• What is public finance?
  Public finance is the study of how governments raise and spend money. It includes topics such as taxation, BUDGETING, and Debt Management.

• What are the different types of taxes?
  There are many different types of taxes, but some of the most common include income taxes, sales taxes, and property taxes.

• What is the budget deficit?
  The budget deficit is the difference between the amount of money a government spends and the amount of money it takes in.

• What is the national debt?
  The national debt is the total amount of money that a government owes.

Monetary Policies

• What is monetary policy?
  Monetary policy is the actions taken by a central bank to control the money supply and interest rates.

• What are the Goals of Monetary Policy?
  The goals of monetary policy are to promote economic growth, low inflation, and stable prices.

• What are the Tools Of Monetary Policy?
  The tools of monetary policy include open market operations, reserve requirements, and the DISCOUNT rate.

Inflation & Control Mechanism

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

• What are the causes of inflation?
  The causes of inflation include an increase in the money supply, an increase in Aggregate Demand, and a decrease in Aggregate Supply.

• What are the effects of inflation?
  The effects of inflation include a decrease in the purchasing power of money, a redistribution of income, and uncertainty in the economy.

• What are the methods of controlling inflation?
  The methods of controlling inflation include monetary policy, fiscal policy, and wage and price controls.

Repo Rate

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

• What is the purpose of the repo rate?
  The purpose of the repo rate is to control the money supply and interest rates.

• How does the repo rate affect the money supply?
  When the repo rate is increased, it becomes more expensive for commercial banks to borrow money from the central bank. This reduces the amount of money that commercial banks have available to lend, which reduces the money supply.

• How does the repo rate affect interest rates?
  When the repo rate is increased, it also increases the interest rates that commercial banks charge their customers. This is because commercial banks need to make a profit on the loans they make, and they can do this by charging higher interest rates.

Reverse Repo Rate

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

• What is the purpose of the reverse repo rate?
  The purpose of the reverse repo rate is to control the money supply and interest rates.

• How does the reverse repo rate affect the money supply?
  When the reverse repo rate is increased, it becomes more attractive for commercial banks to lend money to the central bank. This reduces the amount of money that commercial banks have available to lend, which reduces the money supply.

• How does the reverse repo rate affect interest rates?
  When the reverse repo rate is increased, it also increases the interest rates that commercial banks pay their customers. This is because commercial banks need to attract customers to deposit money with them, and they can do this by offering higher interest rates.

CRR & SLR

• What is the CRR?
  The CRR is the cash reserve ratio, which is the percentage of deposits that commercial banks must hold in reserve with the central bank.

• What is the purpose of the CRR?
  The purpose of the CRR is to control the money supply. When the CRR is increased, commercial banks have less money available to lend, which reduces the money supply.

• What is the SLR?
  The SLR is the statutory liquidity ratio, which is the percentage of deposits that commercial banks must hold in liquid assets, such as Government Bonds.

• What is the purpose of the SLR?
  The purpose of the SLR is to ensure that commercial banks have enough liquidity to meet their obligations.

Sure, here are some MCQs on the topics of Public Finance, Monetary Policies, Inflation & Control Mechanism, Repo Rate, Reverse Repo Rate, CRR & SLR:

1. Which of the following is not a component of public finance?
   (A) Revenue
   (B) Expenditure
   (C) Budget
   (D) Taxation

2. Which of the following is not a monetary policy instrument?
   (A) Open market operations
   (B) Discount rate
   (C) Reserve requirement
   (D) Exchange rate

3. Which of the following is not a Cause of Inflation?
   (A) Increase in money supply
   (B) Increase in aggregate demand
   (C) Decrease in aggregate supply
   (D) Decrease in interest rates

4. Which of the following is not a tool for controlling inflation?
   (A) Monetary policy
   (B) Fiscal policy
   (C) Wage and price controls
   (D) Supply-side economics

5. The repo rate is the rate at which the central bank lends money to commercial banks.
   (A) True
   (B) False

6. The reverse repo rate is the rate at which commercial banks lend money to the central bank.
   (A) True
   (B) False

7. The CRR is the percentage of deposits that commercial banks are required to keep with the central bank.
   (A) True
   (B) False

8. The SLR is the percentage of deposits that commercial banks are allowed to lend out.
   (A) True
   (B) False

9. Which of the following is a positive effect of inflation?
   (A) It encourages investment.
   (B) It reduces the real value of debt.
   (C) It makes exports more competitive.
   (D) It makes imports more expensive.

10. Which of the following is a negative effect of inflation?
    (A) It erodes the purchasing power of money.
    (B) It makes it difficult to plan for the future.
    (C) It can lead to social unrest.
    (D) All of the above.

I hope these MCQs are helpful!