Question

Would you say we’re in a period of contractionary, accommodative, or neutral monetary policy? Explain how you came to this conclusion.

Answer 1

Solution

Here I am taking taking the example of India to explain the solution for the above question

Monetary policy refers to the policy followed by the central banks wherein they control the liquidity / money supply in the economy by using different means like policy interest rates,open market operations etc., in order to achieve the macroeconomic objectives including price stability,controlling consumption and growth in the economy.

India is presently in a period of expansionary monetary policy since August 2018 for the fact that the Reserve Bank of India has been reducing the Repo and Reverse repo rates (which are also called as policy rates).

Date	Repo Rate	Reverse Repo Rate
Apr 19'	6.00	5.75
Feb 19'	6.25	6.00
Aug 18'	6.50	6.25

The RBI has been reducing these rates which indicates that the economy is presently in a stage of expansionary monetary policy.

Expansionary monetary policy is when the central bank stimulates the economy by using it's tools to increase the aggregate demand in the economy.Interest rates are reduced which leads to rise in money supply and also rise in investments in the economy

Rep Rate - The rate at which the RBI lends overnight to banks against their collateral which includes govt.securities and other approved securities.

Reverse Repo Rate - The rate at which the RBI absorbs the liquidity from banks on an overnight basis against some collateral approved securities under LAF