Monetary policy is more effective in raising real GDP the more elastic is LRAS.
Conversely, monetary policy is more effective in raising inflation the more inelastic is LRAS.
With this broad and basic objective, the monetary policy has been pursued to achieve the following objectives of the economic policy of the government of India: (1) To Accelerate the Process of Economic Growth: One of the twin aims of the economic policy is to accelerate the process of economic growth with a view to raise the national income.
The Reserve bank has made the allocation of funds to the various sectors according to the priorities laid down in the plans and requirements of day to day development.
Thus, controlled expansion of money supply was essential for growth with reasonable price stability in the country.
To achieve the objectives of the monetary policy, the Reserve Bank has adopted the following measures: (A) Measures for expansion of currency and credit. These measures are discussed in detail as follows: A.
Monetary policy influences the supply of money the cost of money or the rate of interest and the availability of money.
One of the most important functions of Reserve Bank is to formulate and administer a monetary policy.
For example, monetary policy’s effectiveness depends on the magnitude of the change in interest rates.
Monetary policy is more effective the larger the change in interest rates.