Q: What is the primary objective of monetary policy?
A: The primary objective of monetary policy is to maintain price stability, which means keeping inflation low and stable.High inflation erodes the value of money and disproportionately affects the poor.
Q: How does monetary policy influence economic growth?
A: Monetary policy can influence economic growth by adjusting interest rates. Lowering interest rates makes borrowing cheaper, encouraging businesses to invest and consumers to spend, thus stimulating economic activity.
Q: What role does monetary policy play in exchange rate stability?
A: Central banks can influence the exchange rate by buying or selling foreign currency reserves. A stable exchange rate is important for international trade and can help control inflation by managing import costs.
Q: How does monetary policy support the banking system?
A: Central banks provide liquidity support to banks through tools like the repo rate, ensuring they have enough funds to meet their obligations and maintain financial stability.
Q: What are the tools used in monetary policy to control inflation and promote economic growth?
A: The primary tools used in monetary policy are:
Interest Rates: Raising interest rates can curb inflation by reducing borrowing and spending. Lowering rates can stimulate economic growth by encouraging borrowing and investment. Open Market Operations: Buying or selling government securities in the open market to influence the money supply and interest rates. Reserve Requirements: The amount of funds banks must hold in reserve, affecting their ability to lend and thus influencing the money supply.
Q: How does the RBI prioritize its monetary policy objectives?
A: The RBI Act, updated in 2016, prioritizes price stability as the primary objective of monetary policy. However, the RBI also considers other objectives like economic growth, exchange rate stability, and financial stability while formulating its policies.
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