What does 'Monetary Poilicy' means?

Let me share the information about the monetary policy in some simple words.

The basic objective of the monetary policy are:
1. Controlling Inflation
2. Encouraging growth
3. Financial Stability

When we hear these terms, they may look bit complicated. Let me say these with some simple stories for each.

See, This is the common question that will be raised. If everyone have enough money with them, then where comes the poverty and problem. Then why can't the government produce (print) more money and pass it on to the people?

The answer is simple. NO! It's because let us assume the cost of 1 Kg of vegetable as 10 INR. Suddenly if government prints more currencies and gives to the people and If everyone is made to be a millionaire, what will happen? Everyone gets ready to pay any amount to buy things. Which means the demand will increase.
What will happen if the demand increases and the supply stays at the same point? Obviously, it leads to the raise in the price. If the same extends for a considerable period, this may leads to a situation such that, people may have to take a basket full of money to buy just 1 Kg of vegetable.

Yes! The value of money will go lesser and lesser. What the government can do to control this inflation??? This is a big question. Let me say that in the next part...



Disclaimer:
All the content mentioned above are my own understanding about the article 'MONEY KUMAR and Monetary Policy' relaesed by RBI on November, 2007.