By

RISHI R. SINGH
AJAY K. MISHRA
YUVRAJ SINGH
AMAR K.
 Economic stability refers to an
absence of excessive fluctuations
in the macroeconomy.
 Aneconomy with fairly
constant output growth and
low and stable inflation would
be considered economically
stable.
That is when is Inflations is at
the low and stable level and
the Output growth is constant
then the economy is said to be
stable., that is steady.
 Aneconomy with frequent large
recession, a pronounced business
cycle, very high or variable inflation, or
frequent financial crisis would be
considered economically unstable.
When there is
large
recessions, the
economic
stability is
affected and it
turns Unstable.
The major point in recessions is that, it
directly affects the existing Engineers.
The Diagram explain very well.
 When the
business
cycle is
pronounced
then the
stability is
altered.
 When the
inflation is
very high or
Variable then
there an
alteration in
the Stability.
 Financial
Crisis are
also the
major
reasons for
Economic
stability.
When there are no alterations in the factors like
 Macroeconomy
 Inflations
 Output growth
 Recessions
 Business cycle
 Financial crisis

Then there will be a Stable Economy.

 A central Bank’s changing of the Money Supply
 to influence interest rate and assist the
economy in achieving price stability, full
employment, and economic growth.
 Monetary rule (suggested by monetarism): As
traditionally formulated, the rule says that the
money supply should be expanded each year at
the same annual rate as the potential rate of
growth of the real GDP; the supply of money
should be increased steadily between 3 to 5
percent per year.
 Full Employment:- one of the objectives of monetary
policy is attain full employment. It is not only because
unemployment leads to wastage of potential output.
But also because of the loss of social standing and
self- respect. It also breeds poverty.
 Pricestability :- Another objective of
monetary policy is to stabilize the price level.
Both , rising and falling prices are bad as the
bring unnecessary loss to some and undue
advantage to others. They are associated with
business cycles. So a policy of price stability
keeps the value of money stable, eliminates
cyclical fluctuations. Brings economic
stability, helps in reducing inequalities of
income and wealth, secures social justice and
promotes economic welfare
 Economic growth :-monetary policy can be imposed to
influence the rapid economic growth. Economic
growth is defined as “the process whereby the real per
capita income of a country increases over a long period
of time “it is measured by the increase in the amount of
goods and services produced in a country. A growing
economy produces more goods and services in each
successive time period. Thus, growth occurs when an
economy’s thus, economic growth implies raising the
standard of living of the people, and reducing
inequalities of inequalities of income distribution.
 Balance of payments:- another objective of monetary
policy since the 1950s has been to maintain
equilibrium in the balance of payments. It is also
recognized that deficit in the balance of payments will
retard the attainment of other objectives. This is
because a deficit in the balance of payment leads to a
sizeable outflow of gold,
 Monetary policy plays an important role in increasing
the growth rate of the economy by influencing the cost
and availability of credit by controlling inflation and
maintaining equilibrium in the balance of payments.
 To control inflationary pressures, monetary
policy requires the use of both quantitative
and qualitative methods of credit control. The
open market operations are not successful in
controlling inflation in underdeveloped
countries as the bill market is small and
undeveloped.
 The use of variable reserve ratio is more effective
than open market operations and bank rate policy
in LDCs. Since the market for securities is very
small, open market operations are not successful.
but a rise or fall in the variable reserve ratio by
the central bank reduces or increases the cash
available with the commercial banks without
affecting adversely the prices of securities.
 Monetary policy is important for achieving price
stability. It brings a proper adjustment between the
demand for and supply of money. An imbalance
between the two will be reflected in the price level.
A shortage of money supply will hamper the growth
while an excess will lead to inflation. As the
economy develops the demand for money increases
due to the gradual monetization of the non-
monetized sector, and the increase in agricultural
and industrial production. This will increase the
demand for transactions and speculative motives.
So the money supply will have to be raised more
than proportionate to the demand for money, to
avoid inflation.
 Interest rate policy plays an important role in bridging
the BOP deficit. Underdeveloped countries develop
serious balance of payments. To establish infrastructure
like power, irrigation, transport etc… and directly
productive activities like iron and steel, chemical,
electricals, fertilizers , etc, underdeveloped countries
have to import capital equipment, machinery, raw
materials, spares and components thereby raising their
imports,
 There are four ways in which the central
bank affect the money supply . These are
monetary policy tools:

◦ 1. Open market operations .

◦ 2. Reserve requirements.
◦ 3. Discount rate .
◦ 4. Selective credit control .
 The Process of buying government bonds
from, and selling them to, commercial
banks and general public is called “Open
market operations”.
 An increase in the required reserve ratio
forces the banks with no excess reserves to
decrease its loans, which in turn, decreases
the deposits and that will decrease the money
supply.

 A decrease in the required reserve ration will

increase the money supply.
 It is the interest rate at which the central
bank will lend funds to commercial banks
whose reserves are temporarily below the
required level.

 These loans help banks to meet their

reserve requirements when open market
sales by the central bank cause a sudden
fall of commercial banks reserves.
 A fall in the discount rate encourages
more borrowing by commercial banks
and that increases the reserves of the
banks , which in turn, increases loans
and deposits in the banking system.
This will lead to an increase the money supply.
 When the discount rate increases,
commercial banks are likely to increase
their reserves so as to avoid the costs
associated with an unexpected cash
drain.
 Changes in the discount rate provide a

signal of the central bank intention.

 Examples: margin requirements,
mortgage controls, and maximum
interest rates.
 Margin Requirement:
 It is the fraction of the price of stock that
must be put in cash by the purchaser
and the balance can be borrowed from
the brokerage firm.
 If the central bank would like to increase
the money supply, it will reduce the
margin requirement and the opposite is
also true.