Q.(a) What are the objectives of Monetary Policy ? Explain.

(a) Monetary policy aims at price stability, economic growth, full employment, exchange-rate stability, balance-of-payments equilibrium and equitable credit distribution. (b) The modern (Heckscher-Ohlin) theory explains trade by differences in factor endowments — a country exports goods intensive in its abundant, cheap factor and imports those intensive in its scarce factor. (a) Objectives of Monetary Policy Monetary policy is the policy of the central bank (RBI) to regulate the supply of money and credit to achieve certain goals: 1. Price stability — to control inflation and deflation and keep prices reasonably stable. 2. Economic growth — to ensure an adequate flow of credit to productive sectors so as to promote growth. 3. Full employment — to maintain a high and stable level of employment. 4. Exchange-rate stability — to keep the external value of the currency stable. 5. Balance-of-payments equilibrium — to correct disequilibrium in the balance of payments. 6. Equitable distribution of credit — to direct credit to priority and neglected sectors (agriculture, small industry, weaker sections). 7. Promotion of saving and investment and stability of the financial system. These objectives are achieved through quantitative instruments (bank rate, repo/reverse repo rate, open market operations, cash reserve ratio, statutory liquidity ratio) and qualitative instruments (margin requirements, credit rationing, moral suasion). (b) Modern Theory of International Trade The modern theory, given by Heckscher and Ohlin, is called the factor-endowment or factor-proportions theory. It explains international trade as follows: - Different countries are endowed with different factors of production in different proportions (some are labour-abundant, some capital-abundant, some land-abundant). - The factor that is abundant in a country is relatively cheap, and the factor that is scarce is relatively costly. - Goods also differ in the proportions in which they use factors — some are labour-intensive, some capital-intensive. - Therefore, a country will export those goods that use its abundant and cheap factor intensively, and import those goods that use its scarce and costly factor intensively. - Example: a labour-ab …