Friday, 27 April 2012


There  are  mainly  two  kinds  of  policies  followed: the monetary  and the fiscal policy.In the  monetary  policy ,there  is control of the foreign exchange rate  which  is  fixed  in relation  to another  foreign currency  or  on valuable  commodities  like gold. However  this  highly  depends  on the level of inflation.
The  central  bank  will  increase  the  lending or bank  rate to commercial banks  which  in turn increase interest rates on money borrowed which  discourages  the public  from acquiring loans  hence reduction  of money  circulation in the public.
During  inflation, the central  bank  will  sell  securities like bonds  and  treasury  bills to  commercial banks  and the public  which  will  reduce  the  circulation  of money  in the public
The central bank  also increases  the legal Reserve Requirement  to commercial  banks  that  will  still work towards reduction  of circulation of money in the public.
With  the  fiscal policy, this  involves  increasing  taxes  and  reduction  of  government  expenditure  on  non  productive  ventures. The  government  has  to  spend   more  on  agriculture  to  increase  food  production  that  will in turn  reduce  food  prices  hence improving  the standard  of  living.

No comments:

Post a Comment