MANAGERIAL ECONOMICS: MACRO

FACULTY Dr. S. BISALIAH

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Unit 5
5.A Macro Economics: Concerns and Key Macro Economic Concepts. Macro Economic Concerns: Mi ov Ma r E o o c. c s co c n mi r s Ma r udn Bo k o Ma r E o o c: j B ii l s f co c n mi o l g c s A &A D S F u S c r: H , S G &F S o r e t sH S B , S T o T oMa r resC mmo i Mak t n Mo e Mak t w j Mak t o o : dt re a d n y re y Iea t n mo gl o rg o s n a s tmak t n rco a n a u, o d a d ses re t i b Iea t n ew e d me t a dien t n l re. n rco b te n o sc n n rai amak t t i i t o S e i i u sob a de s diMa r E o o c: p ci s e t e d rse n co c n mi f s c s Rs gPi s in r e i c Rs gU e l me t in n mp y n i o F l gG P ai D l n B l c o P y n C is a ne f ame t r i a s s L n rn c n migo ta dsotu e o o cl t t n. o g u e o o c rwh n h rrn c n mifc ai s uu o G a o Ma r E o o c: o l f co c n mi s s Mai z G Pgo t x e D rwh mi F l mp y n u e l me t l o Pi s bl r e t iy c a i t B l c o p y n e uir m. a ne f ame t q i i a s l u b T o o Ma r E o o c oc a dMa a e n o l f co c n miP ly n s i n g me t : FsaP ly i l oc c i Mo eay oc n trP ly i Oh r oc sTa e Pi a dL b u P lis t P li : rd , r e n a o r oc . e ie c ie The Key Macro Economic Concepts: A ge aeS p l(S C r : g rg t u p A ) uv y e D sr e ,o e c i ng n rl r el e t u nto o tufms r e ci s fr a hgv e ea pi e lh a t f u tr ae b e c v , eq i y p i wl gt sp l in o u p . l i y A : p adSo i S U w r l n Fr wl gt sp lmoeo tua h h r r e . pg i ms in o u p l i y r u t ti e pi s p g c
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P A S

Y O tu u t p

A C S o sh c mbn t n o t pi l ea dl eo o tu D : h w t o i i s f e r ee ln e lf u t e ao h c v v p. A C D ww r l i D : o n adSo n A h h r r e ,e ut nnh a eo mo e pg ti e pi srd co it g c i eV l f n y u sp l d ma dfr u uird c d u p , e n o o t t e ue . y p s P

A D O Y O tu u t p

E uir m l eo o tua dt e uir m pi l e q i i e lf u t n h q i i r ee l l u v b p e l u b c v. A S P 0 E A D O Y O tu u t p 0 P =E uir m Pi L vl qi i l u r e ee b c 0 Y =E uir m L vlf u u q i i eeo O t t l u b p. 0 Y

S i iA Ca dA C ht n D n S : f s C s : Rg tadsi i D d et ni ra ei o n l n y a e1 A ih r htnA C u oa n e s nn mi mo e w f c a s c. tk o
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A S P 1 P 0 E 1 E A 1 D A D O Y Y O tu p 0 1 u t O s r e p i o e uir m (1 a dn wl e f q i r m b ev en w on f q i i E ) n e e l e ui i t l u b v so l u b pi (1 a do tu(1 . r e P ) n u tY) c p C s 2 AltadsiiA Cd et olr eh eo d et do g t a e : e w r ht S u o i i i r u o ru h f fn pc k . P A1 S A S E 1 P 1 P 0 E Y

A D O Y Y 1 0 O tu u t p Y

O s r a i ra eiPa dd ce s io tu b ev nn e s n n e ra e n u t e c p. Two Exceptions: S otu h ro tl S : h rrn oi n A C z a P A smpin su t : o U e l me t n mp y n o o rs uc s fe o re

AS O O tu u t p L n tr A C r : o g em S uv e P
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A A* S S A smpinF l su t : u o l e l me t f mp y no o rs uc s e o re O Y Y* * * O tu u t p A C S i r hr hd et go to o tuoet . S : ht i ti t u o rwh f u t vrme f g g s p i C nie si nA u oa nra eimo e sp l( n trep nin o s r ht d f si Dd et ni e s n n y u p mo eay xa s ) c y o a da i ra eig vrme t xe dt e( ) fc lxa s n n nn e s n oen nep n ir G i aep ni . c u s o C s 1 S ot u a e : h rR n P
1

O Y 0

AS A 1 D A D Y Y O tu u t p 1

A i ra ei nn e s n c o tu b to u t un p, ca g i hnen pi l e r ee l c v

C s 2L n R n ae :og u P A S 1 P E 1 P 0 E
1 E1

A 1 D A D O

A i ra ei nn e s n c P b to , un ca g i hnen o tu u t p

Y Y O tu * u t p I r e fe (0 h ro tlu p cr , c n my o lmoet E 1 f i si dP ) oi n sp l uv e o o w u pc x z a y e d v o 1 L n rn n S otu su t n: o g u a d h rrn iai s t o L n rnG o to po utec p cy o g u: rwh f rd cv a a i. i t S : Dd tr n sh ueo aal lpo utec p cy R A eemi t s f vib rd cv a a i. e e ae i t Inflation and Unemployment, and Unemployment and GDP Growth: P P- =Ilin ae( ealle) = t t na o rt D ti a r ft s t 1
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Pt 1 = O ?

R t o ue l me t n rt o ilin ae fn mp y na d ae f ft : o na o

P i s uv hi C r l p e UER t ( ae %)

U e l me taea dG Prlinh : kn L w n mp y nrt n D e t si O u a o ao p s

I es rlinh . n re e t si v ao p Vtln b te n u u i lk ew e o t t ai p a dl o r re. n a u mak t b O C a g iue l me tae( h n e n n mp y nrt %) o

UER( =N . n mp yd X1 0( ealle) %) o U e l e o 0 D ti a r s t L b u F re a o r oc L b u F re=N . mp yd+N . n mp yd a o r oc oE l e o oU e l e . o

Circular Flow of Economic Activities and Income: HHS and Business Sector.

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C nu t n o smpi o E p n ir xe dt e u F c r pt at I u on s

S vg ai s n

I et n n s v me t

G os od & S rc s ev e i F c r ame t at P y n o s ( RI ) , , , Fg Cru r l o Mo e iaT oS c r c n my i: i l Fo f n yn w e t E o o . ca w o 5.B National Income Accounting: F r lt c r fr co c n miMo e : omas ut e o Ma re o o c d l r u s Po ut n ie A rd co Sd : S i D ma dSd : D e n ie A Ame sr o oea pi l e Su y f ft n a ue f vrl r ee l t o ili . l c v: d na o Ame sr f efr neo Ma re o o : D a ueo p r ma c f co c n myG PT emo to rh ni o h sc mpe e s e v me srs f tlu uit e o o . a ue o t ao t t h c n my o p n e T od fi n o G P w eit s f D : ni o G P Mak t a eo a fa g o sa ds rc sa dttl xe dt eo D : re vl f li l o d n ev e n oa ep n ir n u ln i u n t n o tu ai u t os p. G P S m o a fc r ame t T tl c me D : u f la t p y n l o s oai o . n T oa lc t n t t d fi n f D : w mpfai so h eit o G P i o i e ni o V l o o tucr ny rd c d a e f u tur t po ue u p el I l eo l h a eo fa g o sa ds rc svl fn r dae nu c d n evl fi l o d n ev e yt u n i a eo ieme it u t
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g o s o i l e : a ea d do N t rd cMeh d o d n t c d d V l d e r e Po ut t . nu u o Product Sale Value (Rs./Unit) Value added by each industry (Rs.) Be d ra B k gi ut ai n sy n d r Fo r l u Min i ut l gn sy l i d r Wh a et A r uue gi lr ct F rless e s etzr,e d i i ec t . C e cl dsy h mi i ut an r Total 38 V l o o tu=2 a e fu t 0 u p V l o i o =2 . a e f c me 0 u n C mp r ts i tod fi n o G P o ae h wt w eit s f D . i h ni o T i s o i l e iG P h g nt c d dn D : n nu S cn hn g o s eod ad o d P bc raet nfr ame t u l/ i t r s p y n ip v a e s P rlfa c la s co s ue i ni t na t n yn a r i Ieme it g o s n r dae o d t I in o /te s rd c gg o s n s rc s u iet c ut n a c s i n po ui o d a d ev e o td h o n y d ci z n i s e r N nmak t a s co s h ue o a dvl trw r) o - re t na t n (o s h l n o n y ok r i d ua I g lui s a ti. l ab s e s cvy l e n it T reMeh d o Me sr gN t n l u u he t s f a ui ai aO t t o n o p: 20 20 1 1 1 6 5 5 1 1 5 5 2 0 9 9 Income Generated

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I o R c i dA po c: a tr c meo F c r h r Meh d n me e ev c e p ra hF c I o on r a t S ae t . o o Y=Y +Y +Y+YR +YD i E p n ir A po c: xe dt e p ra h u Y=C+I G+XM + A ge aeD ma d g rg t e n . V l o Po ut p ra h a e f rd cA po c: u Y=P Q +P Q +- - P Q -+ n n 1 1 2 2 n = PQ i i i1 = N mi ln R aG P o n ad e l D : a N D : D a cr npi s G P G P tur t r e e c Commodity Q X Y 1 1 P 10 .0 05 . 1992 NGDP 10 .0 05 .0 1.50 Q 2 3 P 2 07 .5 1998 NGDP 40 .0 22 .5 6.25

Wh ca g iN D f m 15 t 62 ? y hnen G P r o .0 o .5 Q a t efc u nt f t i e y Pi efc re f t c e. T oma evl o ai n ew e 9 2a d1 9 , o u D t o s n k adc mp r o sb te n1 9 n 9 8 c mp t i s eG Pa c nt t a pi s c ldR aG P r e ae e l D . c l Commodity X Q (1998) 2 P (1992) 10 .0 RGDP (1998) 20 .0

05 .0

15 .0

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T tl oa

35 .0

C a g nG P i 9 8d et r ei ra ei l n tdb smai h n ei D n1 9 u opi n e s semi e ye t tg c c i a i n G Pa c ntnpi s ipi o 1 9 . D to s t r e v r e f 9 2 a c z c G PD ftrAueume sr o ilin D elo: s f a l a ue f ft . na o G P =(G P 1 9 =62 = 17 5 D D N D ) 9 8 .5 .8 (G P 1 9 35 R D ) 9 8 .0 =1 9 G Pa cr npi s 9 8 D tur t r e e c 1 9 G Pa c ntnpi s 9 8 D to s t r e a c G P : a ue t ca g ipi s 9 i ra eiN D id et ilin D D Me srsh h n e n r e 7 % n e s n G P s u o na o . e c c ft Oh r a ue o N t n l u uI o t Me srs f ai aO t t c me e o p/ n G P=G P+(a tr ame tf m a ra fc r ame tt a ra ) N D F c p y n r bo d a t p y n o bo d o so o s N P=G PD pe it n D D e rc i ao N P=G PD pe it n N I N D e rc i + FA ao Wh r: ee N I =N t a tr c mef m A ra FA e F c I o r on o bo d =F c r ame tf m a ra fc r ame t a ra . a t p y n r bo d a t p y nt bo d o so o o P I= N U ds iu d C roae S c l e ui o tb t n I n ir t tb e op rt o i S cryC n iuo s a t r i C roaeT xs Ta s r ame t+P ro aIee t c me op rt ae + rnf P y n e s es n l trsI o . n n P I P P ro aT xs n N nT x ame t D = I es n lae a d o -a P y n . s P I N t n l c me C = ai aI o o n T tl o u t n oaP p li ao P rh s gp w r ai: oc mp r pi s n e o o e uca i o e p ryT o ae r e a d c n mis n t c : P : mo no ac r ib se o b s g o s P P A ut f et n a k t f a i o d a c w i c n eb u hit gvn o n y i h h a b o g t h i c ut wt c n e e r h i mo e. t ny s : s f fr o ai df rne ili U eu o c mp r g i e c snin l n f e vg s n ad b te n ain. t d rs ew e n t s a o T erli vrin f P : h e te es o P P av o S=P 1 P 2 Wh r: ee S=E ca g rt o cr ny t cr ny xh n e ae fur c 1 o ur c 2 e e P =C so g o Xwtcr ny o t f o d i ur c 1 h e 1 P =C so g o Xicr ny . o t f o d n ur c 2 e 2

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U e o N t n l c meD t: s s f ai aI o o n aa E oo c l n g c n mip ni a n N t n lno : ni i tr f c n mi rwh F ci tsc mp r o ai a i me A n c o o e o o cgo t o c da a iae o ai n l t s oe t . vri me T c mp t t etn fN I:A me sr o o o u h x to FA e e e a ue fmo iyo e o re , bl frs uc s i t e p c l hma rs uc a dc ptl s e il u n e o re n a i . ay a D tr n grgo ads ai s nh b s o p r a i i o . eemin e in li ri o t a i f e c pt n me i p t e e s a c Me sr o e o o c eae a ue f c n miw lr. f Df uisnh Me srme t f ain l c me icl it f t i e e a ue no N t aI o : o n N n mo ei dt na t n o n te r s co s z a i E : a lme esno e ima a e no t ifmi b s e s xF mi y mb r i l d n n g me t f era l ui s vv h y n : atr Br e : ev e o h uema es S rc s fo s i k r. U og n e S c rE : h s w od n t a i o tx n ra i d e t : xT o e h o o p yn me a. z o c I d q aed t. n e u t aa a Muil s uc so no :S l yi o ,po et no ,df u o l e o re fi me a r n me rp r c me icl t p c a c yi f tt i c lcd t. oe t aa l I g l r o e o o c cvisi du t dn . l af ms f c n mia ti le rg r i l e o it k e a g T ec s o e vo me tl ouo n e rd t nn t u s a tdf m h o t f ni n n p lt na dd ga ai o sb t c r a li o r e r o G P D . G Pa F c r o t n G Pa Mak t r e D t a t C sa d D t re Pi : o c G Pa fc r o t D t t cs ao =G Pa Mak t r e I i cT xs S b iis D t re Pi s n r t ae + u s e c de d G Pa mak t r e =? D t re pi s c 5.C Macroeconomic Models: Two, Three and Four Sector Models: Dv ee o o iofu s c r: id c n myn o r e t s i t o H ue o s c r C oshl et : d o B s e s e tr I ui s s c : n o G vrme te tr G oen ns c : o
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F rinrd s c r X&M. oeg t e e t : a o T oS c r co c n miMo e w e t Ma re o o c d l o : A smpin: su t s o O ltos c r: o s h la dB s e s e tr n w e t sH ue o n ui s S c s y o d n o I e t na e d gvn n s v me t l a y i . r e

T eMo e h dl : Y=C+I C=a+b Y II =o Y=NI . C=C nu r xe dt e o sme ep n ir u I I e t nep n ir, d p n e t furni o (egvn =n s v me t xe dt e i e e d no cr t c me i i ) u n e n . e I I o O V l o o tu=A a e fu t D u p E o e o s aib : V l gvn xg n u vr l I a e i ae: u e E d g n u V r b sY&C V l sob d tr n d n o e o s ai l : ae : a e t e eemi . u e C nu t n uco : o smpi F nt n o i C=fY () C=a+b : i a f co Y Ln ru t n e ni Mah mai l: t e tay cl a=iec p n re t t b=s p le o II =o Y - - - - -() ---- 1 - - - - -() ---- 2 - - - - -() ---- 3

E o o cn rrtt n c n miiepeai : t o C=a w e Y=o , hn t mimu a ut fo sme ep n ir, vn h n a i h n m mo no c nu r xe dt e ee w e s e i u

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Y=0 b=MP =ca g iCp r n o ca g iY=C C h n e n e ui fh n e n t Y d =b c d Y o<b<1 N mei lxmp : =5 +08Y iepeain u r aea l C 0 . , trrtt ? c e n o MP ? S C nu t n e n i ra e wtt l eo i o . o smpi d ma d n e s s i h e lf c me o c h e v n C=a+b Y

I o () n me Y c E uir m i o : D=A q i i n me A l u c b S CI , Y=C+I C+I D ( ) A C I o a O Y() E Fg E uir m I o ud r w S c r d l i: q i i n me n e T o e t Mo e l u c b o . I e t nI o Muilr n s v me t n me l i : c t e p =K=R t o ca g ii o t ca g ii e t n Y ai fh n e nn me o h n e nn s o c v me t . I I C a g ii e t nep n ir = h n e nn s v me t xe dt e u Y=C r s o dn ca g ii o or p n i h n e nn me e g c T eI a t f h n eiIn () h mp co C a g n o Y E: Da rmaiR peain iga t e rtt c o C I & YC I =+ E C IA 2,> + (D )I I 1 1 1 0
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C I(D ) + A 1 0 E 1

I et n a n s v me t , s uc o o re f ca g iY hnen . A 2>A 1 s c D D ,i e n I>I 1 0 Y

a O

YE () YE () Fg C a g ie uir m I o wtca g iIn e T oS c r d l i: h n e n q i i n me i h n e n ud r w e t Mo e l u c b h o . T reS c r d l he e t Mo e o : Y=C+I G + G=G vrme t xe dt e oen nE p n ir. u E uir m I o : q i i n me l u c b V l o Y=A . ae f u D A S CIG , & E 2 C IA 1 + (D ) o E 1 G o CI + o O YE1 () YE2 () Y C I G (D ) + + oA 2 o

Fg E uir m I o ud r he S c r d l i: q i i n me n e T re e t Mo e l u c b o . C a g ie uir m i o wtca g iG h n e n q i i n me i h n e n : l u c b h Da rmmaiR pe e tt n iga t e rs n i : c ao A S CIG , & C I G (D ) + + 1A 2 o C I G (D ) + + oA 1 o

G >G 1 0
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 G O YE () YE1 () Y

Fg I a t fh n eiG k e i C&Io s n i: mp co ca g n ,e pn g c nt t a.

F uS c r d l o r e t Mo e o : Y=C+I G+( M) + X =C+I G+N + X A ti: rwda rm t rpe e t q i r m i o . cvyD a iga o e rs ne ui i n me it l u c b A ti: rwt e da rmsorpe e th n eie uir m i o d e cvyD a h e iga t e rs nca g n q i i n me u it r l u c b t ca g iN : o hnen X Wh n Xin g te e N s e ai v Wh n Xip si e N s oi e t v Wh n X=O eN . 5.D Commodity (Goods) Market and Money Market Analysis. T omanmak t nMa re o o cS s m c mmo i r o d w i resi co c n mi yt e o dt g o smak t n yo re a d Mo e Mak t n y re. C mmo i o dt yMak tE uir m:V l o ain l u u V l o p n i b re q i i l u b a e fn t a o t t= a e fs e dn y u o p u g f co as c r (D . u t n le t s A ) ni o Mo e n yMak t q i r m: e n o ra mo e a ne re E ui i D ma dfre l n yb l c s=S p l fe l n y l u b a up yo ra mo e b l c s Me n go rab l c s a ne a a i fe la ne . n a C mp sin f n y tc (ae) o o i o Mo e So k L tr t o . C mmo i Mak t E uir m C r ( - uv) a d Mo e Mak t o dt y re q i i l u b uv I C r e S e n ny re E uir m C r ( M C r ) i ln o s E uir m i b t t qi i l u b uv L e uv :Smua e u q i i n oh h e t l u b e Mak t res . * I S O Y Y * O tu(c me u tI o ) p n
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L M

 =E uir m rt o iee t * q i i ae f trs l u b n Y =E uir m o tui o . * q i i u t c me l u b p/ n

I C r S i r a dL C r S i r: S uv ht s n M e f e uv ht s e f e I C r S i r: RC S uv ht sO e f e I a dT: j o e , n xMa r n s G o A nra ei , u oo t scep c t n f ui s i ni e s nId et pi t xe t i so b s e sfms c mii ao n r RW. i I C r ( 1 .A d ce s i I u t p si sc . S n S uv I ) e S e ra e n ,d e o e s t mii ep c t n o b s e si L iIC( 2 . xe t i s f ui s fms ao n r WS nS I ) S * * * * * * E 2 E 1 E 3 I1 S I0 S I2 S O Y* Y Y* * * * * O s r : htip is f q i r m a dca g sn a dY b ev S i n on o e ui i n h n e i n . e f s t l u b A i ra ed ce s iGa n : nn e s /e ra e n l e c o R L siiI C r W/W ht S uv fn e C a g sn a dY h n e i n . D a Da rms rw iga A i ra ed ce s iT a n : nn e s /e ra e n x l e c o L R si iI C r W/W ht nS uv f s e C a g sn a dY h n e i n . D a Da rms rw iga L C r S i : nnra eD ce s iSo k f n y M uv ht A I e s /e ra e n tc o Mo e e f s c A i ra eis c o mo e a n nn e s n t k f n y l e c o o R WSiL n MC
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L0 M

Ad ce s is c o mo e a n e ra e n t k f n y l e o o L iL WS n MC

L2 M E 3 * * * * * * E 1 E 2 I0 S O Y*Y Y* * * * O s r : htip is f q i r m a dca g sn a dY b ev S i n on o e ui i n h n e i n . e f s t l u b C a g sn oh i aa dMo eay oc s h n e ib tFs ln c n trP li . ie L0 M L1 M E 1 * E 2 I1 S I0 S O Y Y Y * * Fg E p nin rFPa dM P i: xa s ay o n L1 M L0 M * * * I1 S I0 S O Y

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L0 M L1 M

Y * Fg E p nin rFSa dc n a t n rM P i: xa s ay o n o t co ay r i

5.E Unemployment: U e l me tT esu t nw eet es n h r b ow r n in o n mp y n h iai h r h o : t o ep ro sw oaea l et oka dwl gt l i w r, ios cr w r w i gvsh m i o o me n o leh o . okf l e ue ok h h i t at c e e n me r a s fvlo d c i i T o ew oaef t okb t on t a tow r n e c on t cvls e w r h s h r i ow r u d o w n t oka dh ned o a te e k ok t i y aen t c d da n t ue l e p ro . r o i l e mo g h n mp yd es n nu e o Me srme t fn mp y n C tg r s f ep p lin a ue no ue l me t ae oi o t o u t : o : e h ao E le mp yd o U e l e , ul k gfr j n mp yd b t o i o ao o o n b L b u fre Almp yda due l e , ul k gfr b a o roc : l e l e n n mp yd b t o i o j o o o n o N t l o roc ,o e l e ,o l k gfr ok o i a u fre n t mp yd n t o i o w r. n b o o n U e l me t ae n mp y nR t: o U =N mb r n mp yd X 1 0 R u eU e l e o 0 L b u F re a o r oc L b u F reP rc ain ae a o r oc ati t R t: ip o LP = FR Tp s f . : ye o U E V l trU E o n y .: ua L c o wl g e soa c p t aal lj s a k f in n s t ce t e vib o l i h ae b Moeo ap yh l i lrb m t n n c n mipo l r f sco gc po l h a e o o c rb m. o a e a e I o n rU E n l ty . : vu a L c oj s ak f b o O cr d r gt p r do e o o c e rsin cus ui h ei f c n mid pe s n e o o As c ldccc l . o d pe s n rU E l ae ylaU E r e rsi ay . . o l i o D finy f D C ueo ts i o U E eie c o A : a s f ik d f . . c h n Kn s f vl trU E i oI o n y . : d n ua Src rl . : t t aU E uu D finy ftc o c ptl rlinon e s f rwn l o roc eie c o s k fa i i e t t e d o go i a u fre c o a n ao g b C ptl r t na s e i aal iy f b u fre a i f mai l b h d vibl o l o roc . ao o g n a i a t L b u F re a o r oc A u P p lin dl o u t t ao X 10 0

~1 ~ 8

C cc lU e l me t u t fc ain i e o o c a ti le yla n mp y n i o :D e o l t t s n c n mi cvy i uu o it k rc sin ees . o C rn U e l me t es tnfaueleiud ree p dc ute . ho i n mp y n P rie t t i n n ed vl e o n is c o : s e r k o r S a o aU E e snl . : S a o a caa tr f eti rd co cvislea r uue r e e s n l h rc o c r npo ut na ti i gi lr,i e a i it k e ct c mi ec l t l . s N tuie t ok vib d r gs c s a o . o sf inw r aal l ui l k e s n f c ae n a Fiin l . : r t aU E co O t f okd et l k f efcmo iy f ok r uo w r, u oa o p r t bl o w res c e i t As c ldue l me t ew e j s l ae n mp y nb te no o l o b D et e lei o u od cn ns mea ti sa dep nino s meoh r cvis i cvi n xa s it e o fo t a ti . e it e E : at r p tV sema es xE r en o / e s l k r h O t f ok u t s i s n l k u . uo w r d e o tk a do o t re c s Ds u e U Eo ud rmp y n i i d . r n ee l me t gs o : C mmo ioep p le c ute o nn vro u td o n is a r L wzr magn lrd cvy f b u o / o ri po uti o l o r e a it a U d rmp y nd et ud ree p n n ee l me t u o n ed vl me t o o E : a o roc iA r uue N t l e l e . xL b u fre n gi lr: o fl mp yd ct uy o T cn l i l n mp y n L b u s v gtcn l is e ho gc U e l me t a o r ai e ho ge . o a o : n o C ue o U e l me t I i: a s s f n mp y ni n a o n d So rt o e o o c rwh l ae f c n migo t w I ut n sy d r A r uue gi lr. ct Hg go trt o p p lin ih rwh ae f o u t ao R pdi ra eiw r fred et p p lin rwh a i n e s n okoc u o o u t go t c ao C oc o i p rpit tcn l y h i f a po r e e ho g e n a o D fcv e uain ytm ee te d c t ss i o e L resa rrlra mirt n ag c l uaub n gai e o U d r ulain f c n mirs uc s n e tzt o e o o c e o re i o i L c o po e ma p w r l n g a k f rp r n o e p ni a n P vr a ditrc. oet n lea y y l i Me srsocr U e l me t a ue t ue n mp y n o : I utazt n n s ilai d ri o I ra emo iy f b u n es c bl o l o r i a t
~1 ~ 9

Dvri ain f gi lr a drrlc n my i si t o a r uue n uae o o e f o c ct Efcv ma p w r l n g f te n o e p ni ei a n U e l me t srnesh me O lap l teme sr. n mp y ni ua c ce : n o n y ai i l v a a ue D e UEafcG P : e a O uL w o s . f t D ? R c l kn a . e l s 5.F Inflation: Kinds, Causes and Remedies: T eC ne t h o c ps : Ilin P rie t e ea r ei r el e o p rie ta i uca i na o : es tn g n rli npi e l r es tn flnp rh s g ft s s c v s l n p w r f ny o e o mo e. R t f ft n T ep re tg h n ei vrlee o pi s R c l aeo Ili : h ec n eca g noea l l f r e . na o a lv c e a: l = H p rIlin R t fnainec e s5 % p r n .n1 2 ,i n ye na o : aeo il o xe d 0 e mo t I 9 3 r ei ft ft h s pi b 5 0 p r n iG r n. r e y 0 % e mo t n ema y c h D ft n P rie ta i r el e o p rie ti np rh s gp w r eli : es tn flnpi e l r es tn r ei uca i o e ao s l c v s s n o mo e. f ny C e pn nain As g iiilin E c ua i ofs r rwho re i ft : i l gtna o gIl o n ed ft no rgn gt a t go t f e o tu u t p. G lpn nain D u l rrb iirtsp r nu s yrm2 % t ao i ft : o b l gIl o eo t l gtae e a nm a f e ed o 0 o 1 0 p r nu 0 % e a nm. Sa ft n o i t n o ih a d a c l ai ilin a d h h tgli :C mbn i ao a o fh g n ce rtg na o n i e n ft g ue l me t n l G P n mp y na do D . o w C ue a dKn s f ft n a s s n i o Ili : d na o Ma g t e eae et rrm d ma do sp ls eo b t y e g n rtd ie f h o e n r u p i r oh y d . O h e n ie D et vibl f r nt ed ma ds : u oaal iyo moemo e no d a i t n yi me(xe dt e fr c ep n ir)o a u gvn o meo o tu i vl e u fu t p. O t u p s e D et a e uhpoi uh n u p so k ( edo g t n i nh p l i : u ow g p s, rf s a dsp l h cs l ru ha dol es y d t p y i k pi h eb O E ) re i y P C. c k Pi ep c t n a o c n iu fr ilin ih r t e scy o r e r e xe t i s l c ao s o tb t o na o :Hg e h l ti fpi r e ft e a it c ep c t n, re t magn l t o ilin xe t i sl g rh ao a e ri r e f ft . aa na o D ma dP lnain e n u Il o : l ft A >A D S P u t ec s d ma d d e o xe s e n
~2 ~ 0

A i ra eiA : u t GC o I nn e s n D D e o , r c Ada rmmairpe e tt n f PI iga t e rs n i o D c ao : P A S P 2 P 1 A 1 D A 0 D O Y F O tu u t p Y

O s r tos g n o A cr : b ev w e me t f S uv e s e Frte me t v rlinh b te n u u() n pi l e i s g n +e e t si ew e o t tY a d r ee l s : ao p p c v S c n s g n V rc l Scr e o d e me t etaA uv : i e F l mp y nl eo o tu(F u e l me t vlf u tY) l o e p S i nA t ih s e(D )( u oa nra ei G o o hti D or t i A 1 D et ni e s n f g d c : rI r d ce s iT) Prm P t P . e ra e n x f o 1o 2 Mo eai v wo DPI n tr ti f s e : M > M A P D P S P D S p lo ramo e b l c s D ma dfre l n y a ne . u p fe l n y a ne > e n o ramo e b l c s y a a Mi n r d n l Fi ma : t o e ft ni lasa deeyw eeamo eayp e o n n Ic nb Ili sa y n vr h r na o w n tr h n me o .t a e po ue n yamoerpdi ra ei h u nto mo e t ni rd c do l yb r a i n e s nt c eq a t f n yh n i y a o tu . u t p C sP s Ilin o t uhna o : ft N nra ei D slP h nw g aewt u a yc r s o dn nra ei oi e s nA , t w e a ert c i l io t n or p n i ce s n h e gi po uti. rd cvy it Wa ep s ilin g uhna o . ft A ge s ei ra eiw g rts n o maeilr e . g rsi n e s n a e ae a d r tr pi s v c a c Da rmmairpe e tt n f o t uhnain iga t e rs n i o C s p s il o : c ao ft P A1 S A0 S
~2 ~ 1

P* * P * A 0 D Y Y*Y O tu * * u t p

Poip s nainud r n p lt n lo oscmak t iain c s p s rf uhil o n e mo o osca dog p lt t ft ii i ii re su t s o t uh t o ilin cus u t n nw g fc r a o na o o cr d e o o -a e a t s l . ft o s Efc o Ilin f t f ft : e s na o Eo in fe l c meo p rh s gp w r rs o rai o o n r uca i o e n Efc o d bos n ce i r f t n e tr a d rdt s es o Efc o fe i o go p(e s n r) f t ni d n me ru p ni es es x c o Efc o w ah o es fa hd p ss t f t n e l h l r o c s, e o i ec es t d t Efc o g vrme ti o :A i ra e i a no b t es n l n f t n oen n n me n n e s ntxi me es c c c ohp ro a a d c roaei o txs op rt n me ae c Ilin n l o r rd cvyIlin L b u urs L wl o r rd cvy na o a da u po uti: ft a o r ne t o a u po uti ft b it na o b it Ilin n Mak tg na o a d rei : ft n C nu r, e o n moes ni et r eipi o smesb c mi g r e si o i n r e t v s c Ard c drt o go tirad ma dfr o d a ds rc s e ue ae f rwhn e le n o g o s n ev e i Asiiep n ir a a f m n ne s nag o s n s rc s ht xe dt e w yr o -se t lo d a d ev e . fn u o i i Ilin n iee tae Ilin Hg rt o iee t na o a d n rsrt: ft ih ae f trs ft t na o n . C n oo Ilin o t lf ft : r na o Mo eay oc: s a krt oc, p nmak t p rt n,a h e ev ai n n tr P lyU eb n aep lyo e i i re o eai sc s rs r t d o er oa s l tece i o t lt c n oilin e cv rdt n o o o t l ft . ei c rs r na o C e i q e z. rdt u ee S FsaP lyR d c gB d e D fi i l oc: e ui u g t eit c i n c G T x I o P lyWa eC n o n me oc: g o t l c i r Pi C n o o e s nac mmo i s r e o t l f se t lo c r: i dt i e I ra eulain f rd cv c p bl t ri AS n e s tzt o po ute a a iyo as c i o i i i t e E l g i ott t eoe sotg o s mec mmo is n re mp r o i vr h r e fo a s d a o de Al e eme srsobig t g pb te n Sa dA . lh s t a ue t r e h a ew e A n P d e I eain Ma ea j t n nmo eayrt n oof to s si e l n xt : k d s d o u me t si n tr eu st fe l e nra r s s i o d et ilin I ei ird c diBaio w g s t) n me u o na o (d x g n o ue n rz fr a e ec . c ft n n t l .
~2 ~ 2

S meR linh s o e t si : ao p Ilin n iee tae na o a d n rsrt ft t R aiee tae( =N mi l trsrt Ilin ae e l trsrt i o n iee tae na o rt n ) an ft i R= N mi l trsrt () R aiee tae( +Ilin ae( ) o n iee tae R = e l trsrt i na o rt an n ) ft R=i + A j t no Rt ds u me t f o R Ilin n U e l me t e a P ip C r na o a d n mp y n R c l hls uv ft o : l l i e Ilin n R D a dN D na o a d G P n G P ft Ilin n E ca g R t. na o a d xh n e ae ft C I n WP, n G P : P, d I d D D a a C I vme t f eg tdpi s f o d a ds rc s o g t y P: e no w ih Mo e r e o g o s n ev e b u hb c i c nu r a rtiee o smes teal vl l . : n xmp : A Ea l e A sme C nu r b yhe c mmo i s ifo , su : o sme u t e o s r dt v o d i z e see/oh ga dme i r. h lr l i n t c tn dc e a : 0 o i o o see/oh g 5 % f c me n h lr l i n t c tn : 0 me i t 3% dc e a : 0 fo . 2% od C I r a eya:S y 9 9 P f b s e r(a 1 9 ) o C I (.0X1 0 +(.0X1 0 +(.0X1 0 =1 0 P = 05 0 ) 03 0 ) 02 0) 0. D r g2 0 , t o pi s i b : % 1 2 ui 0 0 l f d r e r e y 2 n eo c s 0 D r g2 0 , th lr lh gr eb : % 1 6 ui 0 0 l see/o i i y 6 n e t c tn s 0 D r g2 0 , t dc r pi s i b : 0 ui 0 0 l me i e r e r e y 1 % 1 0 n e a c s 1. ( P) 0 0=(.0X1 6 +(.0X1 0 +(.0X1 2 =1 64 C I 0 2 05 0 ) 03 1 ) 02 0) 0. =1 641 0=64 0. 0 . 10 0 10 0 ( P) urn Y a ( P) a eY a C IC r t e r C IB s e rX e ( P) a eY a C I s er B

WP: vme t f h l a r e i IMoe n o w o s l i swt e ep c hawd r a k tnl i h s f ie b se i u n o eo c d gt rwmaeila ds mi fi e g o s a tr s n e is d o d . a nh G P : a ue ca g snh pi s fn lo d a ds rc s D D Me srs h n e it r e o fag o s n ev e e c i i po ue iac ut. rd c d n o n y r : o s es a k t f o d a ds rc s rd c deey e r C ni r b se o g o s n ev e po ue vrya. d i

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Price Indices A Comparison Price Index (1) C nu r Pi o sme re c Ie n x d Basis (2) pq 1 0 pq 0 0 pq 1 0 pq 0 0 Wh l a o sl e e Prices (3) R ti eal Basket (4) C nu t n o smpi o g o sa ds rc . o d n ev e i I ue i ot n c smp r d s L re b se o ag r a k t f gos i l i o d, n u n cd g ieme it n r dae t gos B t n o d. u o s rc s ev e i Al d me tay l o sc l i l po ue rd c d fa il n gos od ad n s rc s ev e . i

Wh l a o sl e e Ie n x d

Pi re c

G PD ftr D elo a

pq 1 1 pq 0 1

R ti eal

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Unit 6
Monetary and Fiscal Policy: Instruments and Impacts.
Monetary Policy: A t nb C n a B n R It e u t e n o a dsp lo mo e a dt l co y e t l a k(B)org led ma dfr n u p f n y n h o i r a y efw o ce ioa h v ma re o o c o l frdt ci e co c n mig a . t e s Objectives of M.P: G Pgo t D rwh E l me t e eain mp y ng n rt o o Pi Sa iy r e tbl c i t B l c o p y n e uir m. a ne f ame t q i i a s l u b Scope of Monetary Policy: Mo ei t n f ee o o : l c n mit na t n t ec re uwt n tai o t c n myAl o o cr s co sob ar do t i z o h e a i i h mo e. ny Il neG P po ut n c nu t n s v g i e t n e l me t nu c D , rd co , o smpi , ai ,n s fe i o n v me t mp y n , o , a dep r a di ot n xot n mp r . s s D vl me t fn nil res ee p no fa c mak t o i a . Instruments of Monetary Policy: Q a tv I t me t u nten r n i i su s Q atteS l tece i o t l u l i /e cv rdt n o . i v a ei c rs Quantitive Instruments: Bank Rate or Discount Rate: R t t h hC n a B n e d aea w i c e t l a kl smo e ot r n n yt h o eC mmec l a k n ri B nsa d a rdso n t bl o eca g pe e tdb t C mmec l a k e i ut h i f xh n e rs n c s e l s e yh o e ri B n. a R t i h hC n aB n cag s nh o n a da vne ma et aewt i e t l a k h re o t a s n da c s d o hw c r el t C mmec l a k. h o e ri B ns a Q e t nWh n o sh CBi ra eBRa dd ce s BR u so : e d e t . n e s . n e ra e .? i e c Wh to d e i a t rg le a fw o st nt e u t? l w o a 1 9 :1 9 11 %
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Jn 0 96 a 2 0 : %. Cash Reserve Ratio (CRR): Statutory Reserve Ratio (SRR). % o ttl e o i h hc mmec l a k r e u e oman i n foa d p ssw i o t c ri b nsaerq i dt iani a r t t fr o c s rs r wtt C n aB n L g l bn i . h om fa h e ev i h e t l a k e ay i n e e h e r l dg Wh C R : y R? T cno o o t lmo e u p yca gn C R r n ysp l yb h n i g R E p nin r n xa s aya d o c n a t n rM.. o t co ay P r i T rvn fa c l r i nt a k gs c ric s e n y opee ti ni cisi h n a s eb ni e t ,f a hd ma db n o d p soss e v fr o ra o . e o i r ih ayo s me e s n t 1 9 9 : 5 9 4 51 % Jl2 0 : .5 u 0 8 87 %. y Open market operations: S la dp rh s o g vrme te ui s n b n sd p n i o a n uca e f oen ns cri a d o d , e e dn n e t e g t n e fr e ra i o i ra i lu i it e o o . h e d o d ce s g rn e s gi i t nh c n my e n c n q dy e I d i nt h s e ea q a t tei t me t R I mp y d i n l na dt ot eg n rl u nt i n r n , B e l sa dt a i o e i v su a s o i o q a t tei t me t u nt i n r n : i v su a s Statutory Liquidity Ratio: SLR T c n oaal iy fn net g vrme t n pi t s c r o o t lvibl o fa c o oen na d rae e t . r a i i t v o C mmec l a k oman i etip re tg f eroad i o ri b nst ianac r n ec n eo t ittlal a t a a h y d ma da dt e n n i med p ssnh omo lu ses uh s xe s e o i it r fq i s tsc a ec s t ef i da rs r s urn co n a ne wt t rb nsa db n so e ev ,cr ta c utb l c i h a k n o d f e e a ho e N B R , ee p nb ns n s o . A A D d vl me t a k a d o n o T pee tt c mmec l a k rm g i frlu ai h i o rvn h o e ri b nsf a o on o i i tgt r g qd n e a s t w e C Riri dt c n omo e sp l ses h n R s as o o t l n y u p . , e r y The Repo Rate and Reverse Repo Rate: R p rh s o eain ae(e oR t) e uca e p rt R t R p ae: o Ird c diA r 1 9 . n o ue n pi 9 7 t l , T ma a et sotu lu i o t b ni ss m. o n g h h rrni i t f e a k g yt e - q dy h n e T ert f trsa w i t B l d mo e t h a k fr h aeo iee t t h hh n c eR I n s n yot e eb nso a sot eido 11 d y. h rp r o f -4 as R vreR p R t: ees e o ae T ert t h ht a k a u t e ui so d p s mo e h aea w i h c eb nsc nb yh cri r e o i n y es t e t wtt R I i h B. h e Q attes l tece i o t l s u n : u l i / e i rdt n oi t me t i v e cv a c r nr s
~2 ~ 6

C e i ain g rdt t i ron C a g il dn magn h n e ne i n g ri : B nsa vne l n g i tt mota e o o a k da c o sa an h a s e r g fs mea s t a d g sesl , n b ii , w lr sae s c o g o s n s o . udn j eey h r,t k f o d a d o n l ge l , o T e g p b te n t vl o h mota e po et n a ut h a ew e h a e ft e u e r g d rp r g ya d mo n a vne ic ldl dn magn da c d s ae e i l n g ri . Q e t nL n i magnso o h hw e ? u so : e dn i g riil r i : h n w g T pee tp clinn c rea r uueg o s o rvns e u t isac gi lr o d . ao ct Moasa in rlu s : o P ru dn c mmec lb ns t a vne ce i n a c ra c wt esa i g o ri a k o da c rdti cod ne i a h drcvs f ec n ab n. i te o t e t la k ei h r Drcc n o i to t l e r: I u i co st o s edr t n oc mmec l a k oc r u t il dn cvyi s ei ri b nst ar th re i a yo e n ga ti na it s e i dma n r p ci f e ne. The Limitations and Effectiveness of M.P: Tmel : h i a e ica i ut oc a t ni i l n t n n i a T et g metk nn h ln t ep ly co ,smp me t i a d k go h i i t e ao rs o s t . e p ne i me Po l ifrc sn . rb msnoe a tg e i G o t o o -a k g fa c lieme ir s le mu a ai f d , rwh fn nb ni i ni n r dai i n n a t e k t ls v g u s u n n i ua c c mp n sci a df d , ee p nb ns n s o . n rne o a i ,hs n u sd vl me t a k a d o n s e t n o U d r ee p dmo e a dc ptl res n e d vl e o n y n a i mak t a . Effectiveness of Monetary Policy in India: T epo l o t d -f h rb m f a eof e r : G o tv pi s bl rwh s r e t iy c a i t G o tn e siu i rwh e d l i t q dy Pi s bl n e s o t lvrq ii r e t iy e d c n ooe lu t c a i t r i dy Pi s bl a t d mi no j teo MP Pi s bl a 4 rt o r e t iy sh o n t b cv f . r e t iy t % ae f c a i t e a ei c a i t ilin e a nm. uirat na o p r nu B t e l ? ft n i y Mo eay oc iI i: n trp lynn a i d F i sce s l b l c gt o j te o go ta ds bl . ar uc sf i a ni h b cvs f rwh n t iy l y un a n e e i a i t Fiscal Policy: Fs me n s t t a uy i c a s t e r sr a e .
~2 ~ 7

Fsa p ly h n e nt l e a d p t r f oen n ep n ir, i l oc:C a g si h e l n at no g vrme t xe dt e c i e v e u i o ( xt n, n b r wn . n me t ai )a d or i c a o o g Fsai t me t i l su n : c nr s B d eay oc: eit r up s r a ne b d e u g trp lyD fi srl o b l c d u g t i co u a G vrme t xe dt e oen nep n ir u T xt n aai o P bc b r wn : Ien l a d etra Wol B n, I , F rin u l or i i o g n ra n x n l( r t e d a k MF oeg G vrme t n Mak t orwn ) oen na d re B r i . o g Tp s f ae : i c I i c Po rsi , rp ro aa dR ge s e ye o T xsDr tn r t rge s e Po ot n ln e rsi . e , de , v i v T re vr b s ag tai l : ae Pi t ds o a li o rae i s b n me v p e c Pi t c nu t n xe dt e rae o smpi ep n ir v o u Pi t s v g a di e t n rae ai s n n s v n v me t E p r a di ot xot n mp r s s Pi l e r ee l c v. Fsap ly n ma re o o c o l i loc a d co c n mig a : c i s FPa dE o o c rwh . n c n miG o t Mo i ain fe o re t o g txt n bl t o rs uc sh u haai i o z r o R s uc mo i ainho g p bc orwn s e o re bl t t u h u l b r i i o r z i o g FPfr mp y ng n rt n . o e l me t e eai o o FPfr c n mis blain . o eoo c t i t a i o z E : t l p ca ed r gg b lc n micis xSi u a k g ui l ae o o c r i mu s n o s. FPfr c n mie u l . o e o o c q at i y FPfroeg eca g e ri s n b l c o p y n . . o frin xh n e an g a d a ne f ame t n a s Lmi t n o FP i t i s f .: ao R lb frc s o tre vr b sDf u ea l oe a t nag tai l : icl i e s ae f t i Tmel : ew e d c in n ee uo i a B te n e io a d xct n g s i U d ree p dn t eo t e o o : n ed vl e au f e c n my o r h S l rp ro o p p linnaa li o go p ma po ot n f o u t itxb n me ru s l i ao e c N nmo ei ds c r o - n te e t s o C r pin or t u o E c si b r wn b G vrme tn va l D b Ta . xe s e or i y oen n I i b ? e t rp v o g :e t e T rg le fc lma a e n ft e o o :Fsa R s o s iya d o eu t i a a s n g me to h c n my i l e p ni l n e c bi t B d eay n g me t co 2 0 : u g trMa a e nA t f 0 3 3 o G Pa t u p rmi fsad fiob a h vdb 2 0 -9 B t % f D sh p e l t fc leit e ci e y 0 80 . u e i oi ct e ?

~2 ~ 8

Unit 7
Money supply and Interest Rate, and Interest Rate and Inflation.
Money and National Output/Income (Y): T e rm 1 Mo e d e n t f cYa di f c o lP h oe : n y o s o af t n t f t n . e ae s y Hn C n o poetsh oe ui vrc l S ? i: a yu rv h t rm s g etaA C t i e n i T e rm 2 Mo e afc Yv iee tae( h oe : n y f t i n rsrt i es a t ) Mo e So k n y tc i A D i C I G A . D A D Y=C I +G + C I ai +G t + 1 C I ai i + G t= 0 + N t: <i oe i 0 1 40 5 O Y Y

A si u d et ca g ii D ht p u o h n e n f s Yca g s u t ca g iA hne deo hnen D A is ni et I Mo e s c il ne i Da dY D s e si o t v n y t knu c s, o fe A n . Evolution of Money: B r r ytm at S s e e MeaiMo e tl l c ny P p r ny a e Mo e C e i n yE . rdtad (l t mo e)ce u s c ldn a mo e rdt e: xC e i rs Pa i n y h q e ae e r n y Mo c sc , l Ee t n Mo e: mo e. l r i n ye co c ny Functions of Money: Me i o eca g du f xh n e m Me sr o vl a ue fa e u Soeo vl : big f m t pe e t t fue tr fa e A r e r h rs nt h u r. u d o e o e t Sa d r o eerd p y n :L a s o t ad mo i c ne t n,w g s tn ad fd fr e ame t o n,p s p i s bl o n co s a e , e i e c itbl a ds o . l tcy i n o n e ri l s Demand for Money:

~2 ~ 9

Dfr oM

Dfre l n y a ne o ramo e b l c s a

R =M MB P M =So k fo n l n y tc o n mi mo e a P=G n rlr el e e eapi e l c v. DF nt no R : uco fr MB i D MB= (, . R Yi ) A ti: a it n t eo rlinh ?D a Da rms cvyWh t h au fe t si rw iga . it s e r ao p Three motives of D for M: Ta s co Moi : rna t n te i v Mo e n e e fr o smes n po ueso t na t n. n y e d d o c nu r a d rd c r frr s co s a i Pe a t n rmoi : ome tn rs e ee t(xScn s) rc uo ay te T i v e uf e e n vn E . i e s. o s k S e u teMoi : n yn e e o ma i an rm s e u t no p cli av te Mo e e d dfr k gg i o p cli n v n sf ao fuevl o b n s n s cris u r a e f o d a d e ui . t u t e Mo e d ma d A afw(a s co moi )a da as c (rc uo ay n y e n : s l t na t n te, n s t k pe a t n r o r i v o i moi ) te. v Supply of Money: Two Broad Measures: N r wMo e: iu a s tlecr ny n d ma dd p ss ar o n yLq i sesi ur c a d e n e o i. d k e t Bo dMo e: e siu a s tletr d p ss i b ns ra n yL s l i sesi em e o i wt a k. qd k t h Measures of Money Supply Aggregates: M1 =C r ny i u l +D ma dD p ss i B ns T emo tq i ur c wt bc e n e o i wt a k. h e hp i t h slu i d a s to afa c lytm,ae n r wmo e. ses f i ni ss n a e c ld ar l o ny M2=M1+P sofes v gd p ss otf i ai e o i c n t M3=M2+Tmed p ss i b ns t r e o i wtR I c ldbo d i e o i wt a k +oh d p ss i B t h e t h ae ra l mo e. ny M4=M3+Alt r e o i wtp sofe l h d p ss i o t f . oe t h i c M0 =C r nyi i u t n+B ne e o i i e t l a k(B) ur c nc cli e r ao akr sd p sswt n a B n R I+ t hC r t rd p ss i C n aB n c ldrs r mo e. oh e o i wt e t l a k ae e ev e t h r l e ny Money Multiplier: =M3=R t o bo dmo e ( 3 t rs r mo e ( 0 ai f ra o n yM )o e ev e n yM ) M0
~3 ~ 0

Monetization of the Economy: M1 GDP Monetary Deepening: M3 GDP Determination of Rate of Interest: Demand for money and rate of interest i

d m d m Supply of Money: A smpinC ntn su t : o s t o a i S M

d m O Determination of Rate of Interest i MS S m

i E d m O Mo e ny
~3 ~ 1

MS =MD A ti: a i a t n, MS i ra e o d ce s sD rman gc ntn cvyWh t it mp co if n e s s r e ra e , M e in o s t i c i a? Hn S iiMS cr . i: ht t fn uv e :Wh ti a to i fMD i ra e rd ce s s S rman g a mp c n ,i n e s so e ra e ,M e in c i c ntn os t a? Hn S iiMD cr ? i: ht t fn uv e : aiu vrin o si iMS a dMD a dt i a t n? V r s es s fht n o o f s n n h mp co i e Interest Rate and Inflation: R c l i us n n e l t o iee t n n mi l t o iee t e a ds si o rar e f trsa d o n r e f trs l c o a n aa n . Dsus n i si :Wh th p e st n mi l ae o n rs ui t eido c o a a p n o o n rt fiee td r g h a t n ep r o f p rie ti ig n rlr el ea dp rie t ln e eapi l e es tnr e n e eapi e ln es tnfl g n rlr ee l s s c v s ai c v? : a ra o so w a h p e son mi l t o iee t Wh te s n fr h ta p n t o n r e f trs aa n ?

~3 ~ 2

Unit 8
Foreign Trade Sector, Balance of Payments and Exchange Rate Determination
Some Basic Concepts: Balance of Payments: Ass mai e odo e o o ct na t n fh e ie to ac ut wtt e t yt t c r f c n mi r s co so t s n f o n y i h s e cr a i er d s r h er o t w r d r gagvn eido t . f e ol ui h d n i pr e o fme i R c it n ame t na c ut f o d xotd s rc srn ee n a i l e epsa dp y n so co n so g o sep r , ev e e d rda dc pt e i a rc i db h e ie t f o n y a dg o si otd s rc srn ee n e ev e yt ers n d so aC ut, n o d mp r , ev e e d rda d r e i c ptla s r db t rs e to aC ut. a i t nf r yh e i n f o n y a r ee e d s r BP a c utt i i t: /s co n o n c e s da T eien t n lc n mip sin f C ut h n rai ae o o c o i o a o n y t o t o r C a g snh c mp sin n ma nu eo frinrd h n e it o o i a d g id f eg t e e t o t o a T ee o o c e l o t C ut h c n miw ah f e o n y t h r T ma ed c in a o t P FPa dFTp lis o k e io s b uM., . n . oc . s ie Current Account: Ta s co sd et rd ng o sa ds rc s a dt nfr ame t rna t n u ot ei o d n ev e , n r s p y n i a i a e s (i , rn ,e t ne ec gf ga t rmi c s t t s s t a ) Ta eig o s rd n o d Ta eis rc s leb ni ,htg i ua c ec rd n ev e ( i i a k g sin , srne t k n f i n ) Ta s r ame t rnf p y n . e s S rl icr na c ut up sn ur t co n u e : R c it>P y n . e eps ame t s D fin urna c ut eit cr t co n ci e : R c it<P y n . e eps ame t s Capital Account: R c r o p rh s a ds lo a s tsc a s csb n sl dec e od f uca e n a f ses uh s t k, o d , n t e o a . I moe n o o n rh o fa c lses . N vme t f w esi fn ni a s t s p i a . C o sb re rs od rmoe n no n rh f sessc ssae , i c vme t si w esi po a s t uha h rs dr t e i e t n n ot l ne t n (ei e t n i o d io t n n s v me t dp rooi s ,a fi v me t i n s . v me tnb n swt u a y h
~3 ~ 3

c n ooe t c mp n) o t lvrh o a y r e . B t D: n g me to t lf ea s t rti d uF I Ma a e nc n oo t se i ean . r h s e The Official Reserve Account: H ln s f rin urnyg l n oo b o i o f eg cr c, o dg o e da ds n y C n aB n o t C ut, n e te nt b r wf m I . e t l a k f e o n ya d ntme t or r MF r h r i l o o o T eB Pij t esm o t s t e a c ut h o su t u f e e h e co n . sh h r s BoP is always in balance: B c uea c utgb s do h o b n y e a s co nn a e nt i ed u l t ee r b o e pn ytm( E K )C e i a dd bt R c ita dp y n o kk e i gss e D B S: rdt n e i s s e eps n ame t s C e i+e D bt v. rdt v, e i: :e Balance of Trade and Balance of Payments: B T Df rneit vl o i ota dep r o g o sVs li ms n . o : i e c nh a e f f e e u mp r n xot f o d : ib t o l s s ie e y B P I l e b tv ila di ib i ms E : o : c d s oh ib n n s l t (x nu s e v ie e Balance of Payment Equilibrium: E u l b te n ame t( l o i ot a drc it( l o ep r ) q at ew e p y n v u f i y s a e mp r ) n e eps v u f xot . s ae s E sr q ato h w b ui h oeg eca g e evs vib nuee u l s me o y s gt rin xh n ers r aal l i y n ef e ae ia yhe a c ut n n t e co n . r s B of P Disequilibrium: D et i a neb te n a eo ep r a di ot u o mb l c ew e vl f xot n mp r a u s s T tl c ito e u l ttlame t oar ep n t q at oap y n e o S rl : oarc it T tlame t up sT tl ep > oap y n u e s : e s f c nen L s o a o c r. D fiT tl c it<T tlame t eit oar eps oap y n c: e s : c nen A o c r. ) .

Causes of BoP Disequilibrium: Ilin D fiAg o mak t s lb t b dmak t b y M> . na o ft eit o d re t e, ua a c: o l re t u o X D ft n S rl : g o mak t b yb t b dmak t s l X M. eli ao up sA o d re t u, ua a u o re t e o l >
~3 ~ 4

Sa e o d vl me t tg s f ee p n o : It ltg : X ni s e M> i a a N xs g : > ett e X M a Wi g b lain n e o o c eoms t l as t a d c n mirfr ? h o i o T cn l i l n vt n e ho gc I oai : o an o I oainE p rba e n vt : xot is d n o I oainI ot is d n vt : n o mp rba e . Ds q i r m. i ui i e l u b C cc l i q i r m: ylaDs ui i i e l u b Po p ry rs ei t R c sin ees o D pe s n e rsi o I a t n a dM. mp co X n Oh r a s s t C ue : e C o fir rp ale u R pdgo to p p lin a i rwh f o u t ao A i u d vl me tpo c :H ay i oto q ime t a d mbt s ee p n rj t e v mp r fe u i o o es p n n s ma h ey ci r n . Measures for Correcting BoP Disequilibrium: MPa dF t rd c d ma dfrmp r n P o e ue e n o i ot s C r ny ea ain ur c D vl t : e u o T ma eg o s h a e: o k o d ce p r G o mak t b y u ab dmak t s l o d re t u b t a o , re t e o l X M C r co t B Pds q i r m. > or t no o i ui i ei e l u b Ta eP ly rd oc: i Po t ep r : e ueo a os ep rd t soe c ua eep r rmoe xot R d c r b lh xot ue t no rg xot s i i s Dso rg i ot mp s o as trf rcs m d t s i ot i ua e mp r :I o e rri ai c s e f so ut o ue ,mp r i q oa a dle s t i ot u ts n i ne o mp r c . E ca g C n o xh n e o t l r: G vrme toh v o lec n o oe p rh s n a foeg oen n t aec mp t o t l vr uca ea ds l frin e r eo cr nis ur c . e e E p r r t sr n e a t ifrin xh n ee ri sog vrme t xot so ur d r lh roeg eca g an g t oen n e e le n . N t i ot io tc ne o t mp rwt ule s . o h i
~3 ~ 5

R t n go FEt le s di otr . ai i f . oi ne mp r on c es Bt u : N t p r n ns lin o a ema e to t uo R s isoeg t d a dg i f m frinrd . e tc frinr e n an r oeg t e rt a so a B r wn f m a ra . or i r o g o bo d Ibif oc soc r cB P n r : li t or t o D e P ie e MPa dF t c n oa ge aed ma d n P o o t lg rg t e n r E a j t nt o g d vl t n R ds u me t ru h ea ai h u o Ta ers iin rd e tco s rt E ca g c n o xh n e o t l r B r wn f m a ra . or i r o g o bo d

Determination of Exchange Rate: ER Pi o aC utcr nynems f n t r o n y cr ny .: r e f o n y ur c itr o a oh C ut ur c. c rs e e rs e T oERS s msFxda dFeilERS s m. w . yt : i e e n l b . yt x e e Fixed E.R System: ERfe b g vrme t c nuain i I . . i d y oen ni o slt wt MF x n to h Mak t . =FxdER re ER i e .. C n aB nsT b y n s lh icr nis t fe rt itr o e t l a k: o u a d e t r ur c a a i d ae nems f r le e e x UD S . Mei o F RS s m: rs f E yt t e ERs bl . t iy a i t E s c ptl vme t u t s b ER a y a i moe n d e o t l .. a , ae D mei e r: t Df uisn e gn ER icl ip g i .. f t i e g Flexible (floating) E.R System: CB t lw ER t d s t q aet u p n e n o frin . oao . oa j toe u t h l u esp l dd ma dfroeg ya cr nis ur c . e e A pe it no d pe it no vl f urnyi emso d ma da d p rc i r e rc i f a eo cr c ntr ao ao u e fe n n sp l up . y C r ny p rc t nMoeep ni itr o frin urny ur c A pe i i : r xe s e nems f eg cr c e ao v o e I a t n a dM. mp co X n C r ny e rc t nL s ep ni itr o frin urny ur c D pe i i : e s xe s e nems f eg cr c e ao v o e
~3 ~ 6

I a t n a dM. mp co X n Ce nFo tg C n a B n o t n r n , n lw ER t ef e l a l i : e t l a kn toiev e a dao . ob r l an r t e l ey d tr n d eemi . e Dr l tg C n a B n oiefr ob y n e frincr nist iyFo i : e t l a kt n r et u a ds loeg ur c o t an r te l e e il neER nu c .. fe Determination of E.R under Flexible E.R System: Y 4 7 4 5 4 2 D O X Q at oU D u nt f S i y Fg D tr n t n f Ro U D i: eemi i o E f S ao itr o ` n e FeilE nem f ud r l b R x e S

1U D=` 5 E uir m E S 4 qi i l u R b 1U D=` 7 S>D U Dsrl it mak t S 4 S up snh u e re 1U D=` 2 D>S U Dsotg it mak t S 4 S h r e nh a e re Mak t re t rs r e uir m E . re f c so e t e q i i R o o l u b Rate of Inflation in India and ER: I i: g o mak t s lb t b dmak t b y n a A o d re t e, ua a d o l re t u. o US Ag o mak t b yb t b dmak t s l .: o d re t u, ua a o re t e. o l I a t nXf m a di otoI i, n nt u p o a dd ma dfr mp c o r o n mp rt n a a do h p l f n e n o d es y U Da do E ? S n n R Whether difference in rate of interest between India and U.S impacts ER? A sme T eeaen rs iin o fwo f d b te nn i a dUS su : h r r o e tco s nl f n s ew e I a n .. rt o u d Does changes in ER influence national output/income via changes in AD?

~3 ~ 7

~3 ~ 8

Ecs xe s S pl u py Ecs xe s D ma d e n

Pi L vl r e ee c Pi L vl r e ee c Pi L vl r e ee c Pi L vl r e ee c Pi L vl r e ee c Pi L vl r e ee c Pi L vl r e ee c Pi L vl r e ee c Pi L vl r e ee c
~3 ~ 9

H ue o s oshl d Fr i ms BS Fn nil i c a a Mak t re R t o ca g iIlin ae fh n e nna o ft G o tR t o raG P rwh ae fe l D C nu t n C o smpi ( ) o a o

40 5

40 5 40 5

R t o iee t ae f trs n Pi o U D re f S c (P r S ) ` eU D
~4 ~ 0

E A =A D S

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