What is the main objective of monetary policy?
- A.To increase government expenditure
- B.To maintain price stability and ensure economic growth
- C.To reduce the fiscal deficit
- D.To control foreign exchange reserves
Show answer
Correct answer: B. To maintain price stability and ensure economic growth
Explanation
The correct answer is B, To maintain price stability and ensure economic growth. Monetary policy is run by the central bank, the Reserve Bank of India, which controls the supply and the cost of money in the economy. Under the RBI Act, 1934, as amended in 2016, its main goal is to keep prices stable while keeping in mind the objective of growth. In 2016 India adopted flexible inflation targeting, with a CPI inflation target of 4 per cent within a band of 2 to 6 per cent, and a six-member Monetary Policy Committee sets the repo rate. Tools such as the repo rate, the cash reserve ratio and open market operations let the RBI make credit cheaper or dearer. Option A is wrong because raising government expenditure is a fiscal policy step decided through the Budget. Option C is wrong because cutting the fiscal deficit is also a fiscal policy goal of the government. Option D is wrong because managing forex reserves is a supporting task of the RBI, not the main aim of monetary policy. Exam tip: monetary policy means the RBI and the repo rate; fiscal policy means the government, taxes and spending.