If the monetary system of the country is unorganized then the balance of demand and supply of credit disturbs. Due to which the economic system of the country faces many difficulties. If the amount of credit increases in any country the country becomes inflation stricken, which leads to the problems of dearness. On the other hand, if the amount of credit decreases then the country becomes deflation stricken which leads to the lower investment. Therefore, the central bank of any country takes various steps to maintain the balance of credit in the best interest of the country. These steps are called the tools of controlling credit or monetary policy.
Note: Inflation is a state in which the value of money is falling and prices are rising.
Deflation is a state in which the value of money is rising and prices are falling.
“Monetary policy refers to the measures which the central bank of a country takes in controlling the money and credit supply in the country with a view to achieve specific economic objectives”
The main objective of monetary policy is not only to maintain the conditions of employment in the country but also to create more opportunities of employment in less developed countries.
Maintenance of price stability does not mean to keep the prices fixed but to avoid inflation and deflation. The monetary policy is directed towards controlling inflation by decreasing the total amount of credit or containing its expansion with a desired limit and curing deflation by increasing it.
Exchange Rate Stability:
This means maintaining relative stability in the exchange rate i.e external value of the country’s currency. It also means the maintenance of balance of payment in equilibrium or at least improves its positions.
Equitable distribution of Credit:
This is necessary for social justice because it helps lessening inequality of wealth and income, which increases the standard of living of people. Thus the credit policy should be formulated in a way, which ensures increased flow of credit to backward areas and small borrowers.
Foreign Value of Currency:
Monetary policy helps in consolidating the, external value local currency which leads to growth in trade.
Increase in Investment:
With the help of monetary policy, central bank plays a vital role in the enhancement of investment, which results in economic stability.
Deposits of Gold:
Economy of the country comes onto trouble because o decrease or increases in the deposit of gold. These affects can be removed with the help of monetary policy.
Stability in Capital Markets:
The development of any country depends upon its stable capital market. The central bank takes help of monetary policy in order to creates stability in capital market.
Production of Wealth:
Monetary policy plays an important role in increasing production of wealth, which help to achieve full employment.
Control on Inflation and Deflation:
Central bank generates Economics stability by controlling inflation and deflation in the country.
Increase in production:
With the help of monetary policy, various productive sectors are encouraged to get loans due to which comprehensive increase in production can be expected.