Economics(Paper-4) - Shivaji University

the country.The central bank control the commercial bank as it is chief weapon of
monetary policy. Finally monetary authority should see that the working of financial
institution stimulate the economic development.
2) Interest Rate Policy : Investor always correlate the rate of return of an asset
with rate of interest, if earlier is more than latter, he invests more which leads economic
development. In this sense, it is the job of Central Bank (Monetary authority) should
keep a suitable interest rate policy. In other words at the time of inflation, high rate of
interest and all time depression low rate of interest policy.The existence of high rate of
interest policy acts as an obstacle to the growth of private and public investment in
underdeveloped economy.
To discourage the flow of resources in to speculative borrowings and investment,
the central bank should follow a policy of discriminatory interest i.e. charging high rate
of interest for unproductive loans and low rate of interest for productive loans.
3) Control and Supervision Debt. : Monetary policy should be as such, it is
should control and supervise the debt management in developing economy. It is central
bank which aims at proper timing and issuing of government bonds stabilizing their
prices and minimizing the cost of servicing public debt. The success of debt
management, as a instrument of monetary policy, would depend upon the existence of
well-developed money and capital market. Thus monetary authority play an important
role in economic development through debt management.
4) Equality between Demand for and supply of money : Monetary policy is an
important tool which brings about a proper adjustment between demand for and supply
of money.A shortage of money supply may check of growth of an economy while an
excess of it will lead to inflation. Thus, in an excess of it will lead to inflation. Thus, in an
underdeveloped economy the supply of money and credit should be controlled In such
a way that the price level is prevented from rising without affecting investment and
productivity adversely.
5) Credit Control : Monetary authority of a country aim at controlling credit
through appropriate monetary policy. Generally it makes effort to curbs the inflationary
pressure in the process of economic development. Monetary authority must use the
quantitative and qualitative credit control method to have a requisite space of economic
development.
Along with these methods credit control direct control of plant and equipment,
control of capital issue, discriminatory taxes and control over import and export etc. will
have to be instituted for a necessary economic development in a economy.
C) Role of Fiscal Policy in Economic Development :
1) Meaning and importance : Fiscal policy means the policy of government
regarding taxation, public debt, public Expenditure, to achieve stabilization and economic
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