Question

i) Describe briefly the factors of productivity.

ii) Describe briefly the tools the central bank uses to control the money supply in the economy.

Answer 1

i) Generally there are various factor which affec productivity.

1. Technology = Here, technology means what type of machinery and equipement we use in the production process. If we use good level of technology then the productivity is high and vice versa.

2. Finance = Finance is the most important part to run any business. We need both the fixed capital and working capital to work in a better way. Fixed capital is used to set up plants and machinery, and working capital needs on day to day basis for example money required to pay salary, raw material cost.

3. Organization = Productivity is wholly depends on the relation between the workers and the organization. If there is good relation between the workers and organization, the productivity is high on the other hand if there is no corrdination between the workers and manager it negatively affect the productivity.

4. location of industry= Location and place where the industry set up is directly affect the productivity of the industry. If the location of the industry is near to raw material, easily availability of labour,  government support etc than productivity of the firm is high.

2. The central bank control money supply by using quantitative instrument and qualitative instrument.

Quantitative instrument.

1. Bank rate = If refers to the rate at which the central bank lends money to commercial banks as the lender of the last resort. The central bank actively using bank rate policy to control credit. An increase in bank rate increase the cost of borrowing from the central bank. It forces the commercial banks to increase their lending rates, which discourages borrowers from taking loan. Similarly a decrease in the bank rate will hae the opposite effect.

2. Open market opeation= Open market operations refers to buying and selling of government securities by the central bank from/to the commercial bank.

Sale of securities by central bank reduces the reserve of commercial bank. It adversely affects the bank ability to create credit and decrease the money supply in the economy.

Purchase of securities by central bank increase the reserves and raises the bank's ability of give credit.

Qualitative instruments.

1 Margin requirement = Mawrgin is the difference between the amount of loan and market value of the security by borrrower against the loan. An increase in margin reduces the borrowing capacity and money supply and vice versa.

2. Selective Credit Control = Under the selective credit controls, the Central bank give directions to other banks to give or not to give credit for certain purposes to particular sectors. If the central bank said to give credit for only few sectors it reduces the money supply in the economy on the other hand if central bank does not apply selective credit control then it increase the money supply in the economy.