Effectiveness of monetary policy in the Indian context

Abstract

Because things are scarce, societies are concerned that their resources should be used as fully as possible, and that over time their national output should grow. The achievement of growth and the full use of resources is not easy, however, as witness the periods of high unemployment and recession that have occurred from time to time throughout the world. Furthermore, attempts by governments to stimulate growth and employment have often resulted in inflation and balance of payment crises. Even when societies do achieve growth it is often short lived. Economies have often experienced cycles, where periods of growth alternate with periods of recession, such periods varying from a few months to a few years. Macroeconomics, then, studies the determination of national output and its growth over time. It also studies the problems of recession, unemployment, inflation, the balance of international payments and cyclical instability, and the policies adopted by governments to deal with these problems. Macroeconomic problems are closely related to the balance between aggregate demand and aggregate supply. If aggregate demand is too high relative to aggregate supply, inflation and balance of payment deficits are likely to result. If aggregate demand is too low relative to aggregate supply, unemployment and stagnation (or even recession) are likely to result. Macroeconomic policy, therefore, tends to focus on the balance of aggregate demand and aggregate supply. It can be a frdemand-side-policy", which seeks to influence the level of spending in the economy. This in turn will affect the level of production, prices and employment. Or it can be a "supply-side-policy", designed to influence the level of production directly. 1.1 Different Economic Systems