Economy and Coronavirus

COVID-Puzzle, COVID-Awareness, COVID-19

COVID – 19 has not only affected the asset prices and stock market but real lives and day to day activity. Stock markets have crashed earlier too but this time the situation is very different as there is no manipulation or speculations but a global pandemic.

We can be in a position of recession in coming years. There is no production of goods, there is a forced stop for all production activity, not only within the country but supply of goods from outside the country too.

Everything is so interdependent in the economy. Like if a restaurant is ordered to shut down there will be no demand of green grocer items, unutilized manpower. The owner has to pay their fixed expenses (rent, power, salary etc) but no income in the hands of green grocer and manforce.There is no revenue but expenditure.

A consumer now is spending on essential commodities and there will be a huge fall in the demand of non-essential commodities in the market(affecting its production and revenue generation to economy).

Due to this drop of demand and supply in the economy there is less movement of money in the economy. This lack of economic activity and thereby less money in the economy is going to hit everyone.This story plays across the sectors, across the economy and across the world.The coming days are crucial in terms of dealing with this pandemic and its economic impact.

Both the Monetary and Fiscal policy support will be required to face the tough situation.

COVID-Puzzle, COVID-Awareness, COVID-19

Monetary Policy – Qualitative Instruments to control money supply

Selective or Qualitative methods of credit control aim at regulating and controlling the allocation of credit among various users rather than influencing the general availability of credit.

These are broadly explained below:

1) Margin Requirement:

The commercial banks generally give loans to their customers against some securities. They do not give loans equal to the full amount of the value of security, but of an amount which is less than its value.

The margin requirement of loans refers to the difference between the current value of the security offered for loans and the value of loans granted.

How does the Central Bank control Flow of Credit - Monetary Policy

Management of money supply is an important function of Central bank. High fluctuations in the volume of money (money supply) create the problems of inflation (excess demand) and deflation (deficient demand)

The central bank uses the Monetary Policy / Credit Policy for monetary management.

Monetary Policy is the policy of the central bank to regulate the availability, cost and use of money for achieving certain given objectives of the economic policy.

How Monetary Policy Correct deficient demand situation

After going through Fiscal Policy to control the situation of deficient demand, we will know see how monetary policy of the government can be used to solve the situation of decreased aggregate demand.

Monetary Policy:

Monetary policy can be used effectively to control the situation of deficient demand Monetary policy is the policy of the central bank to achieve various policy of economic policy which includes components like bank rate, open market operations, cash reserve and statutory liquidity ratio to correct deficient demand.Following are the principal components of Monetary policy. Along with each component, we are describing the way it is used to correct situations of deficient demand.

How Monetary Policy Correct Excess demand situation

After going through Fiscal Policy to control the situation of excess demand, we will know see how monetary policy of the government can be used to solve the situation of increased aggregate demand.

Monetary Policy:

Monetary policy can be used effectively to reduce the excess demand. Monetary policy is the policy of the central bank to achieve various policy of economic policy  which includes components like bank rate, open market operations, cash reserve and statutory liquidity ratio to correct excess demand.Following are the principal components of Monetary policy. Along with each component, we are describing the way it is used to correct situations of excess demand.

Bank rate:

Bank rate is the rate at which the central bank lends money to the commercial banks.

To control the situation of excess demand, bank rate is increased, due to this increase of bank rate by central bank, commercial banks raise the market rate of interest(the rate at which commercial bank lend money to the consumers and investors). This will lead to higher cost of borrowing from commercial banks to the consumers and investors. This reduces demand for credit, thereby leading to less liquidity in the hands of the people.Consumption expenditure and investment expenditure are reduced and aggregate demand (AD) will fall.