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Banking: Qualitative Tools of Monetary Policy - Economics, UPSC Mains Exam Video Lecture

FAQs on Banking: Qualitative Tools of Monetary Policy - Economics, UPSC Mains Exam Video Lecture

1. What are qualitative tools of monetary policy in banking?

Ans. Qualitative tools of monetary policy in banking refer to measures taken by central banks to regulate the supply of money and credit in the economy. These tools focus on influencing the behavior of banks and financial institutions to control inflation and stimulate economic growth. Examples of qualitative tools include credit rationing, margin requirements, and selective credit controls.

2. How do qualitative tools of monetary policy work?

Ans. Qualitative tools of monetary policy work by imposing restrictions or requirements on banks and financial institutions. For example, credit rationing involves setting limits on the amount of credit that banks can extend to borrowers. This helps to regulate the overall level of borrowing in the economy. Margin requirements, on the other hand, specify the minimum amount of collateral that borrowers must provide to obtain loans. Selective credit controls target specific sectors or activities by imposing restrictions on lending to those areas.

3. What is the purpose of using qualitative tools in monetary policy?

Ans. The purpose of using qualitative tools in monetary policy is to complement traditional quantitative tools, such as interest rate adjustments. While quantitative tools primarily focus on influencing the cost and availability of credit, qualitative tools aim to direct credit towards or away from specific sectors or activities. This allows central banks to address specific concerns, such as excessive lending in certain sectors or the need to promote priority sectors for economic development.

4. How do credit rationing and selective credit controls help in monetary policy?

Ans. Credit rationing and selective credit controls help in monetary policy by controlling the flow of credit and influencing lending behavior. Credit rationing sets limits on the amount of credit that banks can provide, which helps prevent excessive borrowing and reduces the risk of inflation. Selective credit controls target specific sectors or activities by imposing restrictions on lending, ensuring that credit is directed towards priority sectors or away from sectors that pose risks to financial stability.

5. What are the advantages and limitations of using qualitative tools in monetary policy?

Ans. The advantages of using qualitative tools in monetary policy are that they allow central banks to address specific concerns and target specific sectors or activities. This helps in promoting economic development and maintaining financial stability. However, there are limitations to these tools. They require detailed information and analysis to identify sectors or activities that need regulation. Additionally, there is a risk of unintended consequences, such as the creation of a black market for credit. Therefore, qualitative tools need to be carefully designed and implemented to achieve their intended objectives.

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Jan 06, 2025 Last updated

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