Chapter – 9

D. Long answer questions- I

1ans:- Three fiscal policy measures are:
a. Expenditure Policy: In a situation of excess demand , the government should curtail its expenditure on
public works such as roads, buildings, rural electrification, thereby reducing the money income of the people
and their demand for goods and services. On the other hand, in case of deficiency demand, the government
make large investments in public works, as a result, increase the money income of the people which in
return increase their spending, although it may enlarge budget deficit.
b. Revenue Policy: During inflation, the government should raise rates of all taxes, especially on rich people
because taxation withdraw purchasing power from the tax- payers and to that extent reduces effective
demand. During depression, taxes on personal income and corporate incomes should be reduced to
encourage private consumption and investment. In addition, subsidies, old- age pension, unemployment
allowance and grants should be given.
c. Public Borrowing: In case of inflation, the government resort to large scale public borrowing to mop up
excess money with the public. During deflation, government borrowing from public should be discourage so
as to increase aggregate demand.

2ans:- The quantitative measures of monetary policy are:

a. Repo Rate: It is the rate at which the Central Bank lends to the commercial banks. To check depression, the
Central Bank reduces repo rate thereby enabling the commercial banks to take more loans from it and, in
turn, give more loans to producers at lower rate of interest. During inflation, the Central Bank increases repo
rate thereby making the commercial banks to take less loans from it and in turn, give less loans to producers
at a higher rate of interest.
b. Open Market Operation: In a situation of excess supply, the Central Bank buys the government securities
from commercial banks which increase their cash stock and lending capacity. The commercial banks lend
money at low interest rate which increases people’s borrowing leading to more expenditure by the people.
On the contrary, during inflation, the Central Bank sells government securities to commercial banks which
decrease their cash stock and lending capacity. The commercial banks lends money at high rate of interest
which decreases people’s borrowing leading to less expenditure by the people.
c. Cash Reserve Ratio: Under contractionary policy, the Central Bank increase rate of cash reserve ratio
thereby decreasing the bank capacity to give credit. Whereas under expansionary policy, the Central Bank
reduces rate of cash reserve ratio thereby increasing the bank capacity to give credit.

E. Long answer questions – II

1ans:- Monetary policy is the policy of the Central Bank of a country to control money supply and credit in the
economy. Measures of monetary policy may be (a) quantitative and (b) qualitative as explained below:
A. Quantitative Measures:
i. Repo Rate: It is the rate at which the Central Bank lends to the commercial banks. To check
depression, the Central Bank reduces repo rate thereby enabling the commercial banks to take more
loans from it and, in turn, give more loans to producers at lower rate of interest. During inflation, the
Central Bank increases repo rate thereby making the commercial banks to take less loans from it
and in turn, give less loans to producers at a higher rate of interest.
ii. Open Market Operation: In a situation of excess supply, the Central Bank buys the government
securities from commercial banks which increase their cash stock and lending capacity. The
commercial banks lend money at low interest rate which increases people’s borrowing leading to
more expenditure by the people. On the contrary, during inflation, the Central Bank sells
government securities to commercial banks which decrease their cash stock and lending capacity.
The commercial banks lends money at high rate of interest which decreases people’s borrowing
leading to less expenditure by the people.
 iii. Cash Reserve Ratio: Under contractionary policy, the Central Bank increase rate of cash reserve ratio
thereby decreasing the bank capacity to give credit. Whereas under expansionary policy, the Central
Bank reduces rate of cash reserve ratio thereby increasing the bank capacity to give credit.
B. Qualitative Measures:
i. Margin requirement: Under expansionary policy, to check depression, the Central Bank reduces
margin requirement of loan which encourages borrowing because it induces businessmen to get
more credit against their security. Under contractionary policy, the Central Bank increases margin
requirement of loan which discourages borrowing because it leads businessmen to get less credit
against their security.
ii. Moral Suasion: Under expansionary policy, in case of deficient demand, the Central Bank persuades,
request, appeals or advises its member banks to be liberal in lending and expand credit facilities. In a
situation of excess demand, the Central Bank persuades, request, appeals or advises its member
banks to be strict in lending and reduce credit facilities.
iii. Rationing of Credit: It means fixation of credit quotas for different business activities. Through credit
rationing, the Central Bank can promote social justice while checking state of depression and
inflation.
iv. Direct Action: The Central Bank may resort to direct action against those banks which do not comply
with its direction.

2ans:- Controlling money supply is helpful in dealing the various problems in economy such as controlling excess
demand and excess supply.
In a situation of excess demand or inflation, the Central Bank followed the contractionary policy.
Monetary policy has two measures- quantitative and qualitative as explained below:-
A. Quantitative Measures:
i. Repo Rate: It is the rate at which the Central Bank lends to the commercial banks. During inflation,
the Central Bank increases repo rate thereby making the commercial banks to take less loans from it
and in turn, give less loans to producers at a higher rate of interest.
ii. Open Market Operation: To check inflation, the Central Bank sells government securities to
commercial banks which decrease their cash stock and lending capacity. The commercial banks lends
money at high rate of interest which decreases people’s borrowing leading to less expenditure by
the people.
iii. Cash Reserve Ratio: Under contractionary policy, the Central Bank increase rate of cash reserve ratio
thereby decreasing the bank capacity to give credit.
B. Qualitative Measures:
i. Margin requirement: Under contractionary policy, the Central Bank increases margin requirement of
loan which discourages borrowing because it leads businessmen to get less credit against their security.
ii. Moral Suasion: In a situation of excess demand, the Central Bank persuades, request, appeals or advises
its member banks to be strict in lending and reduce credit facilities.
iii. Rationing of Credit: It means fixation of credit quotas for different business activities. Through credit
rationing, the Central Bank can promote social justice while checking state of inflation.
iv. Direct Action: The Central Bank may resort to direct action against those banks which do not comply
with its direction.
On the contrary, in a situation of excess supply or depression, the Central Bank followed
the expansionary policy.
A. Quantitative Measures:
i. Repo Rate: To check depression, the Central Bank reduces repo rate thereby enabling the commercial
banks to take more loans from it and, in turn, give more loans to producers at lower rate of interest.
ii. Open Market Operation: In a situation of excess supply, the Central Bank buys the government
securities from commercial banks which increase their cash stock and lending capacity. The commercial
 banks lend money at low interest rate which increases people’s borrowing leading to more expenditure
by the people.
iii. Cash Reserve Ratio: under expansionary policy, the Central Bank reduces rate of cash reserve ratio
thereby increasing the bank capacity to give credit.
B. Qualitative Measures:
i. Margin requirement: Under expansionary policy, to check depression, the Central Bank reduces margin
requirement of loan which encourages borrowing because it induces businessmen to get more credit
against their security.
ii. Moral Suasion: Under expansionary policy, in case of deficient demand, the Central Bank persuades,
request, appeals or advises its member banks to be liberal in lending and expand credit facilities
iii. Rationing of Credit: It means fixation of credit quotas for different business activities. Through credit
rationing, the Central Bank can promote social justice while checking state of depression.
iv. Direct Action: The Central Bank may resort to direct action against those banks which do not comply
with its direction.

3ans:- Fiscal policy is the expenditure and revenue policy of the government to accomplish the desired objectives.
The fiscal policy of the government aimed at influencing the level of aggregate demand so as to curb the situation of
excess demand and excess supply. The basic measures of the fiscal policy are Expenditure policy, Revenue policy,
Public borrowing and Deficit financing. According to the aim of the fiscal policy, there are two broad types of fiscal
policy- expansionary and contractionary policy. Contractionary policy is followed when the aim is to reduce the
aggregate demand so as to solve the situation of excess demand. It includes reduced public expenditure, increased
taxes, increased public borrowing and reduced deficit financing. Whereas, expansionary policy is followed when the
aim is to increase the aggregate demand so as to solve the situation of excess supply. It includes increased public
expenditure, reduced taxes, reduced public borrowing and increased deficit financing.
Monetary policy is the policy of the Central Bank of a country to control money supply and credit in the
economy. Monetary policy measures affect the cost of credit and hence, availability of credit. Measures of monetary
policy may be (a) quantitative and (b) qualitative. Further, according to the aim of monetary policy, there are two
broad types of monetary policy- expansionary and contractionary policy. Expansionary policy is followed when the
aim is to cause an increase in the investment expenditure by firms so as to solve the problem of excess supply. It
includes reduced repo rate, buying of securities, reduced cash reserve ratio, reduced margin requirements and moral
suasion. Whereas, contractionary policy is followed when the aim is to cause a decrease in the investment
expenditure by firms so as to solve the problem of excess demand. It includes increased repo rate, selling of
securities, increased cash reserve ratio, increased margin requirements and moral suasion.

4ans:- Fiscal policy is the expenditure and revenue policy of the government to accomplish the desired objectives.
The basic measures of the fiscal policy are Expenditure policy, Revenue policy, Public borrowing and Deficit
financing. According to the aim of the fiscal policy, there are two broad types of fiscal policy- expansionary and
contractionary policy as explained below:
A. Contractionary Policy:
i. Expenditure Policy: In a situation of excess demand , the government should curtail its expenditure
on public works such as roads, buildings, rural electrification, thereby reducing the money income of
the people and their demand for goods and services.in this way, reduce the budget deficit.
ii. Revenue Policy: During inflation, the government should raise rates of all taxes, especially on rich
people because taxation withdraw purchasing power from the tax- payers and to that extent
reduces effective demand. Thus excess demand is rectified.
iii. Public Borrowing: In case of inflation, the government resort to large scale public borrowing to mop
up excess money with the public.
 iv. Deficit Financing: It should be cut down drastically because it leads to increase in demand. Reducing
deficit financing will reduce the government ability to spend which, in turn, will decrease aggregate
demand in the economy.
B. Expansionary Policy:
i. Expenditure Policy: In case of deficiency demand, the government make large investments in public
works, as a result, increase the money income of the people which in return increase their spending,
although it may enlarge budget deficit.
ii. Revenue Policy: During depression, taxes on personal income and corporate incomes should be
reduced to encourage private consumption and investment. In addition, subsidies, old- age pension,
unemployment allowance and grants should be given.
iii. Public Borrowing: During deflation, government borrowing from public should be discourage so as
to increase aggregate demand.
iv. Deficit Borrowing should be encouraged as additional currency generates increased demand for
goods and services and induces more investment.