Exercise

Module-8
Business cycle
Analyse the following cases and answer the following:
1. The consumer price index has gone up due to increase in demand. The
petrol/ diesel prices are rising unabatedly. Unemployment rate has gone
down, and the national output has shown increasing trend. Investment
by the private entrepreneurs has increased, bank lending and deposits
have increased, NPAs have reduced. People and businesses are
prospering.
a) Under the above circumstances, which policy has to be
implemented by the central bank of that Nation and why? Name
the tools in the hand of the Central Bank?
Answer: In the above circumstances the government has to
adopt/ implement Contractionary policy in order to avoid
inflation which is about to come, and in the same way the policy
must be in the favour of the growth of economy & must not
drastically slow down the economy.
The tools includes interest rate mechanism which includes Repo
rate, reverse repo rate, statutory liquid ratio, cash reserve ratio
etc..

b) What kind of fiscal policy has to be adopted and which are the
fiscal tools that the government uses? How should it be
implemented?
Contractionary Fiscal Policy must be adopted in the above situation.
The tools of Fiscal policy includes Taxes, budget, government expenditure,
government borrowings.
The above tools must be implemented in a way which does not hamper the
growth of economy.The government must slowly increase the rates of taxes,
lower its spending & borrowings, the budget must be in a way which does
not create deficit.
 2. The employment position of the country started improving due to
various measures adopted by RBI and Government. The NPA position
with various banks started reducing due to good recovery. Banks have
shown improvement in their profit position. Advances started picking up
resulting in overall increase in the banking business. Good monsoon
resulted in good production of agricultural crops. The related agro based
activities started improving. Industrial production also started picking
up. Overall Economic growth started seeing an uptick.

a) Which phase of the business cycle does the above situation indicate?
What policy measures by RBI and Government would have led the
economy into the above stage?

Answer: The phase of business cycle here is the stage of recovery.

The policy measures adopted by the government & RBI is partial
contractionary policy which implies slight increase in rates of taxes
and interest rates but decrease in government spending and
borrowing and the budget must lead to reduction in deficit which
was created at the time of depression.

b) What impact does expansionary monetary policy have on the private

sector?
Answer: The expansionary monetary policy impacts almost all the
sectors of the economy in a positive way. The business & the
opportunities for the private sectors would increase as there would
be reduction of interest rates and increased money supply in the
market which indirectly triggers supply by way of creating demand
in the economy.

Answer the following:

1. Sudden unexpected change in aggregate demand is known as …demand
shock……………………
2. New health benefits discovered suddenly for product X will have an
effect on its demand. State if it is a positive or negative demand shock. –
positive demand shock------
3. State one example of a negative demand shock. –global pandemic-------
4. Sudden increase in supply of a product results in -increase----- in price
of that product. This is an example of -supply -- shock.
5. The four stages in a business cycle are ---Prosperity, Recession,
Depression, Recovery
6. Inflation can be controlled by expansionary policy by the authorities.
True/ False. False
7. Bank business ----flourishes/at peak-- during prosperity.
8. NPA increases during recovery stage of business cycle. True/False. False
(NPA’s tend to decrease)
9. Taxes are high during -prosperity--phase of business cycle.
10.Bank credit ---increases--during recovery phase of business cycle.