- 06/21/2019 at 9:32 am #1176616EduGorillaKeymasterSelect Question Language :
Direction : Read the following passage carefully and answer the questions given below it. Certain words have been printed in the bold to help you locate them while answering some of the questions.
Financial policies are also called monetary policies. They are very important for a country as these policies determine the economic situation of a country, about its exports, imports, foreign trade policy as well as the currency in circulation. The financial or monetary policies are undertaken by Central bank. This situation is true for all the countries be it developed, developing or underdeveloped. This is the reason why central bank is also called the apex bank of the country as it is one of its kind. It is also called Government’s bank as only the central bank has the right to draw all the financial policies of the country and to function on behalf of the government. Along with this, the central bank also supervises the working of all the commercial banks operating within a country. These commercial banks can be in the private sector or public sector, even the foreign banks operating within a country has to follow the guidelines set by the central bank.
Monetary policies undertaken by Central Bank are designed to bring desired changes in the economy. The monetary measures that are taken under the various financial policies ensure the flow of money supply. Money supply is the supply of money in an economy. It can also be said as currency in circulation such as currency notes and coins. The money supply influences the level of income which means earning of the people; output i.e. the production and the investment which also means the amount of capital formation in the economy.
Expansionary policy of Central Bank increases money supply. As the name suggests, expansionary means increasing the money supply in an economy which the bank does by adopting various measures like purchasing government bonds, decreasing reserve ratio etc. these activities undertaken by Central banks lowers the rate of interest. Reduction in the rate of interest, increases investment as borrowing becomes cheaper. However, one thing here is of grave concern and that is the monetary policies are effective only if it affects the real sectors of the economy such as aggregate supply and aggregate demand that is the sum total of supply or demand. But sometime expansion may also result in inflation. Inflation is constant rise in prices of essential goods and services. This happens when expansion do not yields output rather increases prices.
The monetary expansion undertaken by the central bank in a country raises profits earned by different firms. Rising money supply induces firms to raise production by selling more quantities at high prices. Firms earn extra profit until the time people don’t have inadequate information about market. All this happens in short time period i.e. within a span of a few months to one year. But in economics there is a concept called long run which means long time period i.e. one year and above. In the long run, market adjusts to price changes as there is better understanding of the economy. Workers negotiate their wages. Inflation affects all the sectors thereby causing general price rise. Therefore, the policies made by Central Bank are formulated keeping in mind both the short run and long run in an economy.
The notes and coins in circulation are also referred as ______
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