Role of service industry in economic

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Role of service industry in economic

Role of monetary policy in the economic development of a country are as follows: Appropriate Adjustment between Role of service industry in economic for and Supply of Money, 2.

Role of service industry in economic

Creation and Expansion of Financial Institutions, 5. Suitable Interest Rate Structure, 6. Appropriate Adjustment between Demand for and Supply of Money: Economic development results in rising demand for money because the growth of economy and a corresponding contraction of the subsistence sector greatly increase the transaction demand for money.

Besides, the rise in per capita income and increase in population during the development process also increases the demand for money to carry out day-to-day transactions. The continuously rising demand for money makes it imperative for the monetary authority to increase money supply at a rate roughly equal to the rate of increase in real income, so that prices do not fall consequent upon a rise in national output.

A falling price level adversely affects the pace of economic growth by initiating a vicious downward spiral of prices and output. Similarly, if the supply of money is more than needed by the requirements of trade and industry, it may be used for speculative purposes, thereby inhibiting growth and causing inflation.


The gist of the argument is that a proper control upon the supply of money will prevent economic fluctuations and pave the ground for rapid development.

The monetary policy, therefore, can play a vital role in the economic development of underdeveloped countries by minimizing fluctuations in prices and general economic activity by achieving all appropriate balance between the demand for money and the productive capacity of the economy.

Maintenance of stability in Role of service industry in economic domestic level of prices and exchange rates is an important condition of economic growth.

However, economic development leads to inflationary pressures in under-developed countries due to a variety of structural rigidities and imbalances.

The inflationary increase in prices adversely affects the propensity to save and diverts invertible resources into speculative and unproductive investments such as real estate, jewellery, gold, stock-piling of goods etc. The monetary authority, therefore, should keep a constant vigil on the movement of prices and so regulate the supply and direction of money and credit that it puts a check on rising prices.

Similarly, inflationary increase in prices leads to the frequent devaluation of the currency. The fluctuating exchange rates adversely affect international trade and the earning of foreign exchange tails, which could help in the development of the country. In short, instability in internal prices and exchange rates impedes the rate of sustained economic growth and consequently monetary policy should aim at preventing excessive increase in prices and maintaining exchange stability at some realistic level.

This implies the adopting of such monetary policies that will check inflation and frequent development of the currency. A developing country generally suffers from balance of payments difficulties because of the high propensity to import and limited capacity to export.

In such a situation, the monetary policy should be directed to improving the foreign exchange position. The monetary authority can employ both traditional weapons of control such as bank rate, open market operations etc.

In under-developed economies, governments have to spend on a gigantic scale under the planning process to secure growth rate commensurate with the growth rate of population and also to provide social and economic overheads.

But the rate of saving being low, the government has to resort to large scale borrowing and deficit financing to cope with the rising investment. Since there is dearth of complementary resources in such economies and the supply curve of goods is generally inelastic, the abnormal increasing effective demand generated by huge government expenditure paves the way for inflation.

The best remedy for fight inflation is to reduce aggregates pending, encourage savings and discourage hoarding. For this, the Central Bank may raise the bank rate which would reduce the pressure of demand for bank credit by making borrowing costlier than before and this will discourage borrowing for hoarding and speculative purposes.

On the other hand, an increase in the rate of interest will stimulate savings. To reduce the credit creating capacity of the banks further, the Central Bank may supplement it with the sale of government and banks securities, raising the serve ratio and by instituting selective credit controls.

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Thus the Central Bank by relying on both the quantitative and qualitative instruments of credit control can limit inflation and help the process of economic development. With a view to secure an accelerated rate of economic growth, the monetary authority should press into service its techniques of credit control to influence and shape the character and pattern of investment and production.

This will, of course, depend on the range of credit institutions that exist in the economy and also on the forms of credit controls that are employed by the Central Bank. The commercial banks, mainly provide short-term credit requirements of businessmen and traders and are reluctant to provide medium and long-term credit to meet the financial requirements of industry and for manufacturing in general.

The monetary authority should step in to make appropriate guarantees and provide rediscounting facilities with a view to induce and encourage banks to provide medium and long-term loans for productive purposes. Besides joint loans by commercial banks and state owned financial institutions can greatly help in this direction.

Similarly, selective credit controls should be adopted to influence the pattern of investment and production by differentiating between the costs and availability of credit to different sectors and industries. The selective credit control, unlike quantitative credit control makes discrimination between essential and non-essential use of bank credit and helps the funds to flow into desirable channels and uses without affecting the economy as a whole.

Thus in an underdeveloped economy, the monetary authority should control the uses of money and credit by an appropriate monetary policy so that investible resources flow into desirable channels without adversely affecting investment and production.

This will quicken the pace of development. Creation and Expansion of Financial Institutions: Monetary policy can speed up the process of economic development by improving the currency and credit system of the country.

For this propose more banks and financial institutions need to be established to provide larger credit facilities and to mobilise saving for productive purpose. In under-developed countries there is death of financial institutions and banking facilities are available only to a limited extent.Importance Of Mining To The Economic Development Of Africa.

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