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Types of Monetary Policy Expansionary Monetary Policy: If a country has a high unemployment rate, particularly during a crisis such
as a slowdown or a recession, the country's monetary authority, which
is generally the central bank, might pursue an expansionary policy aimed at enhancing economic growth and expanding economic activity. As part of expansionary monetary policy, the succeeding monetary authority frequently reduces consumer interest rates through different methods that make money-saving comparatively unfavourable and supports market spending.
Contractionary Monetary Policy Contractionary monetary policy is when a central bank utilizes monetary policy instruments to combat inflation. Because inflation is a sign of an overheated economy, the bank must reduce economic growth to keep the situation under control.
As a result, conflicting monetary policy may result in slower economic development and more unemployment, although it is frequently essential to control inflation.
Instruments of Monetary PolicyRepo Rate The repo rate is the interest rate the RBI lends commercial banks for short-term loans (less than 90 days.
Reverse Repo Rate: The reverse repo rate is the rate at which the RBI holds all banks' excess deposits. Bank Rate It is the rate at which the RBI grants commercial banks long-term loans (lasting more than 90 days.
Cash Reserve Ratio: The RBI requires every bank to maintain this % of total deposits. It must be paid in cash only. The RBI does not pay interest on its reserve money. It might range from 0% to 15%. The RBI announces the CRR in its monetary policy.
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