Page 8.

KEY TAKEAWAYS

 Price elasticity of demand is a measurement of the change in

consumption of a product in relation to a change in its price.
 A good is perfectly elastic if the price elasticity is infinite (if demand
changes substantially even with minimal price change).
 If price elasticity is greater than 1, the good is elastic; if less than 1, it is
inelastic.
 If a good’s price elasticity is 0 (no amount of price change produces a
change in demand), it is perfectly inelastic.
 If price elasticity is exactly 1 (price change leads to an equal
percentage change in demand), it is known as unitary elasticity.
 The availability of a substitute for a product affects its elasticity. If there
are no good substitutes and the product is necessary, demand won’t
change when the price goes up, making it inelastic.

Page No. 9

Difference between Giffen Goods and Inferior Goods.

A Giffen good is always an Inferior good.

However, for Giffen goods, the income effect is significantly higher than

the substitution effect.

In the case of inferior goods, as the income increases, the demand for that good
decreases. For Giffen goods, this effect is amplified by the lack of substitutes,
so people consume more as the price rises, even though the real income has
decreased.

Velben Goods.

This means that the demand for Veblen goods is not solely driven by the
product’s inherent qualities, but also by its perceived status and exclusivity. As
a result, as the price of a Veblen good increases, the demand for it may also
increase, as people perceive it to be even more exclusive and desirable.
Clearly, an high price can be also read as a result of high production costs and
so high quality. However, we know that is not always true.
Eg. Luxury goods, fine art, luxury Clothing, Fine Jewellery.

Page 10
Differnce between monopoly and monopolistic market.
 Monopoly refers to a single producer or seller of a good or service, while
monopolistic market is the scope of that monopoly.
 In a monopoly, one supplier provides a particular good or service to many
consumers, while in a monopolistic market, the monopoly (or dominant
company) exerts control over the market, enabling it to set the price and
supply.
 Monopoly is characterized by a single firm, while monopolistic competition
has multiple firms vying for customers by differentiating on quality, features,
and marketing.
 A monopoly is a market structure where the participant is a single seller that
dominates the overall market as he is offering a unique product or service,
while monopolistic competition is a competitive market with only a handful of
buyers and sellers who provide close substitutes.

What Is an Oligopoly?
An oligopoly is a type of market structure that exists within an economy. In an
oligopoly, there is a small number of firms that control the market. A key
characteristic of an oligopoly is that none of these firms can keep the other(s)
from having significant influence over the market. The concentration ratio
measures the market share of the largest firms. There is no precise upper
limit to the number of firms in an oligopoly, but the number must be low
enough that the actions of one firm significantly influence the others. An
oligopoly is different from a monopoly, which is a market with only one
producer.

KEY TAKEAWAYS

 An oligopoly is a market structure wherein a small number of producers

work to restrict output and/or fix prices so they can achieve above-
normal market returns.
 Economic, legal, and technological factors can contribute to the
formation and maintenance, or dissolution, of oligopolies.
  The major difficulty that oligopolies face is the prisoner's dilemma that
each member faces, which encourages each member to cheat.
 Government policy can discourage or encourage oligopolistic behavior,
and firms in mixed economies often seek government blessing for ways
to limit competition.

Page 21

Stock market:

What Is the Stock Market?

The term stock market refers to several exchanges in which shares of publicly held companies
are bought and sold. Such financial activities are conducted through formal exchanges and
via over-the-counter (OTC) marketplaces that operate under a defined set of regulations. 

Both “stock market” and “stock exchange” are often used interchangeably. Traders in the stock
market buy or sell shares on one or more of the stock exchanges that are part of the overall stock
market.

The leading U.S. stock exchanges include the New York Stock Exchange (NYSE) and
the Nasdaq.

KEY TAKEAWAYS

 Stock markets are venues where buyers and sellers meet to exchange equity shares of public
corporations.
 Stock markets are components of a free-market economy because they enable democratized
access to investor trading and exchange of capital.
 Stock markets create efficient price discovery and efficient dealing.
 The U.S. stock market is regulated by the Securities and Exchange Commission (SEC) and local
regulatory bodies.12
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Understanding the Stock Market

The stock market allows buyers and sellers of securities to meet, interact,
and transact. The markets allow for price discovery for shares of corporations
and serve as a barometer for the overall economy. Buyers and sellers are
assured of a fair price, high degree of liquidity, and transparency as market
participants compete in the open market.

The first stock market was the London Stock Exchange which began in a

coffeehouse, where traders met to exchange shares, in 1773.3 The first stock
exchange in the United States began in Philadelphia in
1790.4 The Buttonwood Agreement, so named because it was signed under
a buttonwood tree, marked the beginning of New York’s Wall Street in 1792.
The agreement was signed by 24 traders and was the first American
organization of its kind to trade in securities. The traders renamed their
venture the New York Stock and Exchange Board in 1817.5

A stock market is a regulated and controlled environment. In the United

States, the main regulators include the Securities and Exchange Commission
(SEC) and the Financial Industry Regulatory Authority (FINRA).2

U.S. Securities and Exchange Commission. "About Trading and Markets ."
1

The earliest stock markets issued and dealt in paper-based physical share
certificates. Today, stock markets operate electronically.

Though it is called a stock market, other securities, such as exchange-traded

funds  (ETFs) are also traded in the stock market.

Equity markets:

What Is an Equity Market?

An equity market is a market in which shares of companies are issued and
traded, either through exchanges or over-the-counter markets. Also known as
the stock market, it is one of the most vital areas of a market economy. It
gives companies access to capital to grow their business, and investors a
piece of ownership in a company with the potential to realize gains in their
investment based on the company's future performance. 

KEY TAKEAWAYS

 Equity markets are meeting points for issuers and buyers of stocks in a
market economy.
 Equity markets are a method for companies to raise capital and
investors to own a piece of a company.
 Stocks can be issued in public markets or private markets. Depending
on the type of issue, the venue for trading changes.
 Most equity markets are stock exchanges that can be found around the
world, such as the New York Stock Exchange and the Tokyo Stock
Exchange.

Depreciation /appreciation/devaluation of Indian rupee:

For Prelims: Depreciation of Indian Rupee, Currency depreciation, inflation,
Depreciation Vs Devaluation, Appreciation Vs Depreciation

For Mains: Impact of Depreciation of Indian Rupee on economy

Why in News?
The Indian rupee fell to an all-time low of 77.44 against the U.S. Dollar.

What is Depreciation?
 About:
o Currency depreciation is a fall in the value of a
currency in a floating exchange rate system.
o Rupee depreciation means that the rupee has
become less valuable with respect to the dollar.
 It means that the rupee is now weaker than
what it used to be earlier.
 For example: USD 1 used to equal to Rs.
70, now USD 1 is equal to Rs. 77, implying
that the rupee has depreciated relative to
the dollar i.e. it takes more rupees to
purchase a dollar.
 Impact of Depreciation of Indian Rupee:
o Depreciation in rupee is a double-edged sword for
the Reserve Bank of India.
 Positive:
 Weaker rupee should theoretically
give a boost to India’s exports,
but in an environment of
uncertainty and weak global
demand, a fall in the external
 value of rupee may not translate
into higher exports.
 Negative:
 It poses risk of
imported inflation, and may make
it difficult for the central bank to
maintain interest rates at a record
low for longer.
 India meets more than two-thirds
of its domestic oil requirements
through imports.
 India is also one of the top
importers of edible oils. A weaker
currency will further escalate
imported edible oil prices and
lead to a higher food inflation.
Appreciation Vs Depreciation

 In a floating exchange rate system, market forces (based on

demand and supply of a currency) determine the value of a
currency.
 Currency Appreciation: It is an increase in the value of one
currency in relation to another currency.
o Currencies appreciate against each other for a
variety of reasons, including government policy,
interest rates, trade balances and business cycles.
o Currency appreciation discourages a country's
export activity as its products and services become
costlier to buy.
 Depreciation Vs Devaluation:
 o If the value of the Indian Rupee is weakened through
administrative action, it is devaluation.
 While the process is different for
depreciation and devaluation, there is no
difference in terms of impact.
o India used to follow the administered or fixed rate of
exchange until 1993, when it moved to a market-
determined process or floating exchange rate.
 China still adheres to the former.
What are the Reasons for Current Depreciation of Indian Rupee?
 Sell-off of the Equity:
o A sell-off in the global equity markets which was
triggered by the hike in interest rates by the U.S.
Federal Reserve (central bank), the war in Europe
and growth concerns in China due to the Covid-
19 surge, led to the rupee depreciation.
 Outflow of Dollar:
o The outflow of dollars is a result of high crude
prices and the correction in equity markets is also
causing adverse flow of dollars.
 Tightening of Monetary Policy:
o Steps taken by RBI to tighten the monetary policy to
counter rising inflation has also led to depreciation.
How the Depreciation of Rupee Impact the Overall Economy?
 The current account deficit is bound to widen,
depleting foreign exchange reserves and weakening the
rupee.
  With higher landed prices of crude oil and other crucial
imports, the economy is definitely inching towards cost-push
inflation.
o Cost-push inflation (also known as wage-push
inflation) occurs when overall prices increase
(inflation) due to increases in the cost of wages and
raw materials.
 Companies may not be allowed to fully pass on the burden of
high costs to consumers, which, in turn, affects government
dividend earnings, raising questions about budgeted fiscal
deficits.
UPSC Civil Services Examination, Previous Year Questions
Q. Which one of the following is not the most likely measure the
Government/RBI takes to stop the slide of Indian rupee? (2019)

(a) Curbing imports of non-essential goods and promoting exports

(b) Encouraging Indian borrowers to issue rupee denominated Masala Bonds
(c) Easing conditions relating to external commercial borrowing
(d) Following an expansionary monetary policy

Ans: (d)

 Currency depreciation is a fall in the value of a currency in a

floating exchange rate system. Currency depreciation can
occur due to factors such as economic fundamentals, interest
rate differentials, political instability or risk aversion among
investors. India follows the floating exchange rate system.
 Curbing imports of non-essential goods will lessen the
demand for Dollars and promoting export will help in
increasing the flow of Dollars into the country, thus, helps in
control rupee depreciation.
  The Masala Bond is directly pegged to the Indian currency. If
Indian borrowers issue more rupee denominated Masala
Bonds, this would increase liquidity in the market or increase in
the rupee stock against few currencies in the market and this
would help in supporting the rupee.
 External Commercial Borrowing (ECB) is a type of loan in
foreign currencies, made by non-resident lenders. Thus, easing
conditions of ECB’s helps in receiving more loans in foreign
currencies would increase the inflow of forex, leading to rupee
appreciation.
 Expansionary monetary policy is set of policy measures used
by the RBI to stimulate the economy. It will lead to the money
supply in an economy. However, it may not influence the
variations of rupee value.
 Therefore, option (d) is the correct answer.
Q. Consider the following statements:

The effect of devaluation of a currency is that it necessarily

1. improves the competitiveness of the domestic exports in the foreign markets

2. increases the foreign value of domestic currency

3. improves the trade balance

Which of the above statements is/are correct?

(a) 1 only
(b) 1 and 2
(c) 3 only
(d) 2 and 3

Ans: (a)

Exp:
  Currency devaluation is the deliberate reduction in the value of
a country’s currency against another currency. The main
effects of currency devaluation are:
o Exports become cheaper to foreign customers
o Imports become expensive
o In the short-term, a devaluation tends to cause
inflation
o Higher employment and faster GDP growth
 A country pursues a policy of devaluation to boost its exports
as its products and services become cheaper to buy. In other
words, the competitiveness of domestic exports improves in
the foreign markets. Devaluation will not increase the foreign
value of domestic currency. Hence, 1 is correct and 2 is not
correct.
Inflation:

Inflation is and has been a highly debated phenomenon in economics. Even

the use of the word "inflation" has different meanings in different contexts.
Many economists, business people, and politicians maintain that moderate
inflation levels are needed to drive consumption, assuming that higher levels
of spending are crucial for economic growth.

The Federal Reserve typically targets an annual rate of inflation for the U.S.,

believing that a slowly increasing price level keeps businesses profitable and
prevents consumers from waiting for lower prices before making purchases.
There are some, in fact, who believe that the primary function of inflation is to
prevent deflation.

Others argue that inflation is less important and even a net drag on the
economy. Rising prices make it harder to save money, driving individuals to
engage in riskier investment strategies to increase or even maintain their
wealth. Some claim that inflation benefits some businesses or individuals at
the expense of others.

KEY TAKEAWAYS
  Inflation describes a situation where prices tend to rise.
 Economists believe inflation is the result of an increase in the amount
of money relative to the supply of available goods.
 While high inflation is generally considered harmful, some economists
believe that a small amount of inflation can help drive economic growth.
 The opposite of inflation is deflation, a situation where prices tend to
decline.
 The Federal Reserve targets a 2% inflation rate, based on the
Consumer Price Index (CPI).
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How Can Inflation Be Good For The Economy?

Understanding Inflation
Inflation is often used to describe the impact of rising oil or food prices on the
economy. For example, if the price of oil goes from $75 a barrel to $100 a
barrel, input prices for businesses will increase and transportation costs for
everyone will also increase. This may cause many other prices to rise in
response.

However, most economists consider the actual definition of inflation to be

slightly different. Inflation is a function of the supply and demand for money,
meaning that producing relatively more dollars causes each dollar to become
less valuable, forcing the general price level to rise.

 
The Federal Reserve targets a 2% annual inflation rate, believing slow and
steady price increases help encourage business activity.1

The Impact of Inflation

The primary impact of inflation is decreasing purchasing power. Although the
denomination of currency doesn't change, the impact of inflation is that the
same amount of currency can buy less across inflationary periods. Though
individuals may receive the cost of living adjustments to wages they take
home, they more commonly see repercussions in the groceries they buy, the
rent they pay, and transactions they incur.

As a result of higher inflation, the Federal Reserve often enacts monetary

policy leading to higher federal funds rates. Higher federal funds rates have a
domino effect to many other forms of lending and cause the cost of debt to be
higher. Higher federal funds rates often, and credit card rates.

Because of higher debt rates, a downstream effect of higher inflation is a

slower economy. During inflationary periods, prices are higher, and it is more
expensive to incur debt. For these two reasons, companies often sell fewer
products and the economy slows. This may lead to diminished corporate
profits, layoffs, and pressures on households.

The end result of this cycle of events is a potential recession. The Federal
Reserve tries to balance stemming inflation and maintaining acceptable
levels of unemployment. However, each of the two items often moves in
opposite directions. Their policies often increase one and decrease the other.
Though there are no guarantees on the downstream effects of monetary
policy, the Federal Reserve often risks causing a recession when combatting
inflation.

Benefits of Inflation
When the economy is not running at capacity, meaning there is unused labor
or resources, inflation theoretically helps increase production. More dollars
translates to more spending, which equates to more aggregated demand.
More demand, in turn, triggers more production to meet that demand.

British economist John Maynard Keynes believed that some inflation was

necessary to prevent the Paradox of Thrift. This paradox states that if
consumer prices are allowed to fall consistently because the country is
becoming too productive, consumers learn to hold off their purchases to wait
for a better deal. The net effect of this paradox is to reduce aggregate
demand, leading to less production, layoffs, and a faltering economy.2

Economists once believed an inverse relationship existed between inflation

and unemployment, and that rising unemployment could be fought with
increased inflation. This relationship was defined in the famous Phillips curve.
The Phillips curve was somewhat discredited in the 1970s when the U.S.
experienced stagflation.

Who Benefits From Inflation

Inflation makes it easier on debtors, who repay their loans with money that is
less valuable than the money they borrowed. This encourages borrowing and
lending, which again increases spending on all levels. For example, if a
debtor has $10,000 of debt during an inflationary period, that debt has less
worth as time progresses. From a purchasing power standpoint, it's more
advantageous to slowly pay off this debt during highly inflationary periods due
to the debt's diminishing value.

More specifically, homeowners that have agreed to long-term, fixed

mortgages may benefit from inflation. Higher rates often push prospective
buyers out of the market, so those who are in greater financial positions may
benefit from the diminished housing market.

Because of the slowing economy and risk of recession, individuals that have
tenure at their job or are in more secure positions often benefit. People in
positions of less demand or start-up departments/companies are more at-risk
of corporate budget cuts.

Last, when inflation is higher, the purchasing power of one country's currency
often weakens against other international currencies. This often causes
downward pressure that strengthens the value of international currencies in
relation to the inflationary currency. Those owning foreign currency that take
advantage of favorable exchange rates may benefit from inflation of another
country.

Inflation is fluid, meaning it is constantly changing. Investors, consumers, and

individuals should be aware of how one month's inflation and government
policies may differ from prior periods.
When Inflation Is Bad
For many, the term inflation is a signal of bad things in the economy.
Consumers face rising prices, escalating risk of layoffs, and decreasing
purchasing power. This is especially true for those who do not receive salary
or wage increases that keep up with the cost of living.

Consumers trying to make large purchases may be priced out of the market
when inflation is high. As the Federal Reserve raises rates, the cost of debt
increases causing many prospective homebuyers not able to afford the new
monthly payment amount.

Inflation is also bad for consumers tied to fixed economic items. One example
is workers who are in fixed-term temporary contracts that do not allow for
wage increases. Another example is investors dedicated to fixed-income
securities. Those fixed-income securities earn a specific rate that likely would
be higher during an inflationary period but is fixed for the term of the
investment.
Last, retirees face many disadvantages regarding inflation. It is true that
Social Security and other government benefits are adjusted for inflation.
However, benefit increases often lag prices, so retirees may be forced in
absorb higher prices.

How Does the Government Measure Inflation?

In the United States, the Bureau of Labor Statistics (BLS) publishes
a monthly report on the Consumer Price Index (CPI). This is the standard
measure for inflation, based on the average prices of a basket of consumer
goods.

What Causes Inflation?

Milton Friedman famously described inflation as the result of "too much
money chasing too few goods," resulting in higher prices. Inflation can
sometimes be the result of an increase in the money supply due to
government spending. It can also be the result of increased demand or a
shortage of consumer goods. Following the COVID-19 pandemic, inflation
rose sharply in the United States, largely due to supply chain bottlenecks and
emergency government spending, including stimulus checks sent to
households.

What Is the Inflation Rate?

The U.S. inflation rate was reported at 7.1% as of November 2022.3

How Can I Benefit From Inflation?

Several investments are tied to CPI measurements or prevailing inflation
rates. By owning these investments, you're essentially guaranteed a nominal
return (though the real return may be very marginal). In addition, inflation
often puts buying pressure on households due to higher prices and the
heightened cost of debt. To take advantage of this situation, consumers may
be wise to reserve money during lower inflation periods to have greater
purchasing power during high-cost debt periods.

The Bottom Line

For many, inflation is scary and detrimental. For others, inflation is a
necessary part of growing the economy. An important consideration of
inflation is the government's response which often raises interest rates, slows
the economy, and increases the risk of inflation. During inflationary periods,
some parties benefit while others face greater risks.

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Balance of payments:

What Is the Balance of Payments (BOP)?

The balance of payments (BOP), also known as the balance of international
payments, is a statement of all transactions made between entities
in one country and the rest of the world over a defined period, such as a
quarter or a year. It summarizes all transactions that a country's individuals,
companies, and government bodies complete with individuals, companies,
and government bodies outside the country.

KEY TAKEAWAYS

 The balance of payments includes both the current account and capital
account.
 The current account includes a nation's net trade in goods and
services, its net earnings on cross-border investments, and its net
transfer payments.
 The capital account consists of a nation's transactions in financial
instruments and central bank reserves.
 The sum of all transactions recorded in the balance of payments should
be zero; however, exchange rate fluctuations and differences in
accounting practices may hinder this in practice.
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The Balance Of Payments

Understanding the Balance of Payments (BOP)

The balance of payments (BOP) transactions consist
of imports and exports of goods, services, and capital, as well as transfer
payments, such as foreign aid and remittances. A country's balance of
payments and its net international investment position together constitute its
international accounts.

The balance of payments divides transactions into two accounts: the current

account and the capital account. Sometimes the capital account is called the
financial account, with a separate, usually very small, capital account listed
separately. The current account includes transactions in goods, services,
investment income, and current transfers.

The capital account, broadly defined, includes transactions in financial

instruments and central bank reserves. Narrowly defined, it includes only
transactions in financial instruments. The current account is included in
calculations of national output, while the capital account is not. 

If a country exports an item (a current account transaction), it effectively

imports foreign capital when that item is paid for (a capital account
transaction). If a country cannot fund its imports through exports of capital, it
must do so by running down its reserves. This situation is often referred to as
a balance of payments deficit, using the narrow definition of the capital
account that excludes central bank reserves. In reality, however, the broadly
defined balance of payments must add up to zero by definition.

In practice, statistical discrepancies arise due to the difficulty of accurately

counting every transaction between an economy and the rest of the world,
including discrepancies caused by foreign currency translations. 

 
The sum of all transactions recorded in the balance of payments must be
zero, as long as the capital account is defined broadly. The reason is
that every credit appearing in the current account has a corresponding debit
in the capital account, and vice-versa.

History of Balance of Payments (BOP)

Before the 19th century, international transactions were denominated in gold,
providing little flexibility for countries experiencing trade deficits. Growth was
low, so stimulating a trade surplus was the primary method of strengthening a
nation's financial position. National economies were not well integrated,
however, so steep trade imbalances rarely provoked crises. The industrial
revolution increased international economic integration, and balance of
payment crises began to occur more frequently.
The Great Depression led countries to abandon the gold standard and
engage in competitive devaluation of their currencies, but the Bretton Woods
system that prevailed from the end of World War II until the 1970s introduced
a gold-convertible dollar with fixed exchange rates to other currencies.1

As the U.S. money supply increased and its trade deficit deepened, however,
the government became unable to fully redeem foreign central banks' dollar
reserves for gold, and the system was abandoned.2

Since the Nixon shock—as the end of the dollar's convertibility to gold is

known—currencies have floated freely, meaning that a country experiencing
a trade deficit can artificially depress its currency—by hoarding foreign
reserves, for example—making its products more attractive and increasing its
exports. Due to the increased mobility of capital across borders, balance-of-
payments crises sometimes occur, causing sharp currency devaluations such
as the ones that struck in Southeast Asian countries in 1998.3

During the Great Recession, several countries embarked on competitive

devaluation of their currencies to try to boost their exports. All of the world’s
major central banks responded to the financial crisis at the time by executing
dramatically expansionary monetary policy. This led to other nations’
currencies, especially in emerging markets, appreciating against the U.S.
dollar and other major currencies.

Many of those nations responded by further loosening the reins on their

monetary policy to support their exports, especially those whose exports were
under pressure from stagnant global demand during the Great Recession.4

Special Considerations
Balance of payments and international investment position data are critical in
formulating national and international economic policy. Certain aspects of the
balance of payments data, such as payment imbalances and foreign direct
investment, are key issues that a nation's policymakers seek to address,

While a nation's balance of payments necessarily zeroes out the current and

capital accounts, imbalances can and do appear between different countries'
current accounts. The U.S. had the world's largest current account deficit in
2020, at $616 billion. China had the world's largest surplus, at $274 billion.5

Economic policies are often targeted at specific objectives that, in turn,

impact the balance of payments. For example, one country might adopt
policies specifically designed to attract foreign investment in a particular
sector, while another might attempt to keep its currency at an artificially low
level to stimulate exports and build up its currency reserves. The impact of
these policies is ultimately captured in the balance of payments data.

What Is a Balance of Payments (BOP) Example?

Funds entering a country from a foreign source are booked as credit and
recorded in the BOP. Outflows from a country are recorded as debits in the
BOP. For example, say Japan exports 100 cars to the U.S. Japan books the
export of the 100 cars as a debit in the BOP, while the U.S. books the imports
as a credit in the BOP.

What Is the Formula for Balance of Payments?

The formula for calculating the balance of payments is current account +
capital account + financial account + balancing item = 0.

What Is BOP and Its Components?

The BOP is all transactions between entities in one country and the rest of
the world over some time. There are three key BOP components, including
the current account, capital account, and financial account. The current
account must balance the capital and financial accounts.

How inflation is measured:

What is inflation?

Inflation is when a nation’s currency loses purchasing power over time. It’s reflected in rising
prices for a broad range of goods and services in a society. When prices rise, the same amount of
money can buy less of those goods and services. Therefore, the higher the price, the lower the
purchasing power of that currency, and the higher the rate of inflation. Inflation is typically
expressed as the annual percentage change in the prices of those items.

One of the most common causes of inflation is an increase in the supply of a given currency, or
more cash in the market. This can happen for a few reasons: Monetary authorities could print
more currency, or financial institutions could loan out more money. 

A sudden change in the supply of a product or commodity resulting from a major, unexpected
event—known as supply shock—can also cause inflation. This happened in 1973, when the
Organization of the Petroleum Exporting Countries (OPEC) imposed an oil embargo against
Western nations in retaliation for their decision to support Israel during the Arab-Israeli War.
This caused a major shortage of gas in the U.S., sharply driving up prices for not just oil and gas
but many other consumer goods.

Generally speaking, some inflation is inevitable. Most economies will see positive but moderate
inflation. Ideally, in a growing economy, wages will rise more than enough to offset the rise in
prices.

How is inflation measured?

Inflation is the rate at which a currency’s purchasing power changes between two points in time.
A currency’s purchasing power is measured by price indexes, which track prices for a constant
set of goods and services (often hundreds of them) produced in an economy. They reflect an
average consumer’s spending habits in a given market. They are also weighted:  Changes in the
price of something people buy often affects the price index more than changes in the price of
something they buy less often.

Two of the most common price indexes are the consumer price index (CPI) and personal
consumption expenditures price index (PCE). Inflation can be calculated by referring to either
index. The U.S. Bureau of Labor Statistics (BLS) reports the CPI every month, and major
institutions rely on the CPI to adjust lending rates and other financial decisions.

 The CPI

is an index that tracks how much it costs to buy common goods and services (called “a
basket of goods”) including gas, medication, and food. CPI is calculated by first noting
the retail price for each product or service in the basket. These prices are compared to
their prices the year before in order to determine the change in price. CPI takes the
retail price change and averages them based on their weight, or by giving each a
relative importance, in the basket. 

 The PCE

is similar to the CPI, but includes a wider variety of consumer goods and services in its
basket, such as insurance and health-care costs. 

Higher index prices typically indicate higher demand for goods, which usually leads to a higher
inflation rate. Lower index prices typically indicate lower demand for goods, which leads to a
lower inflation rate.
How are inflation rates calculated?

Inflation rates are measured by the change in value of a price index over time. They are
expressed in percentage terms, and can be derived via this formula:
‍inflation rate = (final price index value - initial price index value / initial price index value) x
100

For example, let’s say someone wants to determine the inflation rate between dates one year
apart. They would:

1. Locate the price index data on either the CPI or PCE for the beginning
and end dates of their identified period. 

2. Plug the final (the most recent) and initial (the past) index values into
the formula.

3. Subtract the initial value from the final and divide the difference by
the initial index value.
4. Multiply the result by 100. This gives you the percent rate of inflation.
The same formula can be applied to prices between two points in time. Let’s say a carton of milk
is worth $3 in 2021, and $3.50 in 2022. To calculate the inflation rate between 2021 and 2022:

1. Find the difference between 3.5 and 3

2. Divide that difference (0.5) by 3 

3. Multiply by 100 

In this example, the one year inflation rate for a carton of milk is 17%.

How do central banks manage inflation?

Central banks control the minting and distribution of a currency for a nation or
common market (like the European Union). They can use policy to fend off unwanted
inflation. In the U.S., the central bank is the Federal Reserve, which aims for a target
rate of inflation of 2% a year.

One way the Fed seeks to hit this target rate is by adjusting interest rates. When inflation is high,
the Fed may raise interest rates to make it more expensive for consumers to borrow money. This
is done in an effort to slow consumer spending, slow economic growth, and bring inflation back
down.

What are some things individuals can do to protect against inflation?

The surest way to protect an individual from the effects of inflation is to secure and grow their
income at a rate that outpaces the inflation rate. If the inflation rate is 3% per year, an individual
would need to earn a 3% raise on their salary each year to keep up. However, for people who
can't increase their earnings, like retirees on fixed incomes, inflation can erode their living
standards.

Investing is another way to potentially increase one’s income to keep pace with inflation.
The average annual stock market return has been roughly 10% over the past 30 years. While past
returns do not guarantee future gains, the market has historically outpaced the rate of inflation.
However, investing in the stock market comes with risks. Investors should research options or
consult a professional before jumping in.

‍Bonds issued by corporations or the U.S. government are another option to potentially

supplement one’s income to keep pace with inflation. They are less risky bets than the stock
market, but they usually offer lower returns.

The bottom line

Some inflation is a feature of a healthy economy. Economies tend to grow more often than they
don’t, and with that, consumer spending, and thus prices, rise. Inflation happens when the same
amount of currency buys less today than it did in the past. Inflation’s overall effect on the
economy will depend on the severity and predictability of price changes. Having a basic
understanding of how inflation evolves over time, and its effect on everything in the economy
will also help individuals who are concerned about how inflation affects their lives. Earning
more and investing may also cushion against the impact of inflation.

Can inflation Support growth? If yes How?

 Low, stable and predictable inflation helps money keep its value and makes it
easier for everyone to plan how, where and when they spend.
  When consumers expect prices to rise, they spend now, boosting economic
growth.
 Rapid economic growth tends to cause upward pressure on prices and wages,
leading to a higher inflation rate.
 A healthy core inflation rate of 2% can lead consumers to believe prices will
continue rising, driving consumer spending and economic growth.
 Some economists believe that a small amount of inflation can help drive
economic growth.
Page 28

Monetary Policy.

What Is Monetary Policy?

Monetary policy is a set of tools used by a nation's central bank to control the
overall money supply and promote economic growth and employ strategies
such as revising interest rates and changing bank reserve requirements.

In the United States, the Federal Reserve Bank implements monetary policy

through a dual mandate to achieve maximum employment while keeping
inflation in check.

KEY TAKEAWAYS

 Monetary policy is a set of actions to control a nation's overall money

supply and achieve economic growth.
 Monetary policy strategies include revising interest rates and changing
bank reserve requirements.
 Monetary policy is commonly classified as either expansionary or
contractionary.
 The Federal Reserve commonly uses three strategies for monetary
policy including reserve requirements, the discount rate, and open
market operations.
Phillips Curve:

What Is the Phillips Curve?

The Phillips curve is an economic theory that inflation and unemployment
have a stable and inverse relationship. Developed by William Phillips, it
claims that with economic growth comes inflation, which in turn should lead to
more jobs and less unemployment.

The original concept of the Phillips curve has been somewhat disproven due
to the occurrence of stagflation in the 1970s, when there were high levels of
both inflation and unemployment.12
KEY TAKEAWAYS

 The Phillips curve states that inflation and unemployment have an

inverse relationship. Higher inflation is associated with lower
unemployment and vice versa.
 The Phillips curve was a concept used to guide macroeconomic policy
in the 20th century, but was called into question by the stagflation of the
1970s.
 Understanding the Phillips curve in light of consumer and worker
expectations shows that the relationship between inflation and
unemployment may not hold in the long run, or even potentially in the
short run.
Understanding the Phillips Curve
The concept behind the Phillips curve states the change in unemployment
within an economy has a predictable effect on price inflation. The inverse
relationship between unemployment and inflation is depicted as a downward
sloping, concave curve, with inflation on the Y-axis and unemployment on the
X-axis. Increasing inflation decreases unemployment, and vice versa.
Alternatively, a focus on decreasing unemployment also increases inflation,
and vice versa.3

The belief in the 1960s was that any fiscal stimulus would increase aggregate
demand and initiate the following effects. Labor demand increases, the pool
of unemployed workers subsequently decreases and companies increase
wages to compete and attract a smaller talent pool. The corporate cost of
wages increases and companies pass along those costs to consumers in the
form of price increases.

This belief system caused many governments to adopt a "stop-go" strategy

where a target rate of inflation was established, and fiscal and monetary
policies were used to expand or contract the economy to achieve the target
rate. However, the stable trade-off between inflation and unemployment
broke down in the 1970s with the rise of stagflation, calling into question the
validity of the Phillips curve.1

Federal Reserve Bank of San Francisco. "The Natural Rate of Unemployment over the Past
100 Years ."
2

The Phillips Curve and Stagflation

Stagflation occurs when an economy experiences stagnant economic growth,
high unemployment and high price inflation. This scenario, of course, directly
contradicts the theory behind the Phillips curve. The United States never
experienced stagflation until the 1970s, when rising unemployment did not
coincide with declining inflation.4 Between 1973 and 1975, the U.S. economy
posted six consecutive quarters of declining GDP and at the same time
tripled its inflation.5

Expectations and the Long Run Phillips Curve

The phenomenon of stagflation and the break down in the Phillips curve led
economists to look more deeply at the role of expectations in the relationship
between unemployment and inflation. Because workers and consumers
can adapt their expectations about future inflation rates based on current
rates of inflation and unemployment, the inverse relationship between
inflation and unemployment could only hold over the short-run.2

When the central bank increases inflation in order to push unemployment

lower, it may cause an initial shift along the short-run Phillips curve, but as
worker and consumer expectations about inflation adapt to the new
environment, in the long-run, the Phillips curve itself can shift outward.

This is especially thought to be the case around the natural rate of

unemployment or NAIRU (Non Accelerating Inflation Rate of Unemployment),
which essentially represents the normal rate of frictional and institutional
unemployment in the economy. So in the long-run, if expectations can adapt
to changes in inflation rates then the long-run Phillips curve resembles and
vertical line at the NAIRU; monetary policy simply raises or lowers the
inflation rate aftermarket expectations have worked themselves out.62

In the period of stagflation, workers and consumers may even begin

to rationally expect inflation rates to increase as soon as they become aware
that the monetary authority plans to embark on expansionary monetary
policy. This can cause an outward shift in the short-run Phillips curve even
before the expansionary monetary policy has been carried out, so that even
in the short run the policy has little effect on lowering unemployment, and in
effect, the short-run Phillips curve also becomes a vertical line at the NAIRU.

Page 42.

Employment Generation Schemes/ Programmes of Government of India | Directorate General of

Employment (DGE)

Sr. Name of the Ministry Remarks

No. Scheme/
 Programme
1 Atmanirbhar Ministry of Aatmanirbhar Bharat Rojgar Yojana (ABRY) was launched with
Bharat Rojgar Labour and 2020 as part of Atmanirbhar Bharat package 3.0 to incentivize  emp
Yojana Employment employment along with social security benefits and restoration of l
(ABRY) Covid-19 pandemic. The website link for the scheme is https://lab
bharat-rojgar-yojana-abry
2 Pradhan Mantri Ministry of Pradhan Mantri Rojgar Protsahan Yojana (PMRPY) was launched
Rojgar Labour and to incentivise employers for creation of new employment. The be
Protsahan Employment 31st March, 2019 will continue to receive the benefit for 3 years fr
Yojana under the scheme i.e. upto 31st March, 2022. 
(PMRPY)
3 National Career Ministry of Project for transformation of the National Employment Service to
Service (NCS) Labour and related services like job matching, career counselling, vocational
Project Employment skill development courses, apprenticeship, internships etc. This
important components namely - (i) NCS Portal (www.ncs.gov.in);
and (iii) Interlinking of Employment Exchanges. The website is http
4 Mahatma Ministry of MGNREGA is to provide at least 100 days of guaranteed wage emp
Gandhi Rural to every rural household whose adult members volunteer to do un
National Rural Development website link for the scheme is https://nrega.nic.in/MGNREGA_new/Nre
Employment
Guarantee Act
(MGNREGA)
5 Pradhan Mantri Ministry of The Garib Kalyan Rojgar Abhiyaan (GKRA) is a 125-day Abh
Garib Kalyan Rural Prime Minister on 20th June, 2020 with a mission to address the
Rojgar Development workers and similarly affected rural population by Covid-19 pa
Abhiyaan pronged strategy of providing immediate employment & livelih
(PMGKRA) distressed, to saturate the villages with public infrastructure and crea
boost the income generation activities and enhance long term li
giving focus on 25 works in 116 selected districts across 6 States w
Rs. 50,000 crore. The website link f
is https://rural.nic.in/en/press-release/garib-kalyan-rojgar-abhiyan
6 Aajeevika - Ministry of Aajeevika - National Rural Livelihoods Mission (NRLM) was lau
National Rural Rural Rural Development (MoRD), Government of India in June 201
Livelihoods Development investment support by the World Bank, the Mission aims at creat
Mission institutional platforms of the rural poor, enabling them to increase
(NRLM) sustainable livelihood enhancements and improved access to finan
link for the Mission is https://nrlm.g
methodName=showIndex#gsc.tab=0
7 Pt. Deen Dayal Ministry of Deen Dayal Upadhyaya Grameen KaushalyaYojana (DDU-GKY)
Upadhyaya Rural development program for rural poor youth under National Rural Liv
Grameen Development since September, 2014. Rural Youth in the age group of 15-35 ye
Kaushlya scheme. Sub component of NRLM which is a placement linked ski
Yojana (DDU- rural poor. The website link for the scheme is http://ddugky.info/
GKY)
8 Rural Self Ministry of RSETIs are Rural Self Employment Training Institutes,  an initia
Employment Rural Development (MoRD) to have dedicated infrastructure in each distr
and Training Development training and skill upgradation of rural youth geared towards entre
Institutes RSETIs are managed by banks with active co-operation from the
(RSETIs) State Governments. The details is at website:http://nirdpr.org.in/rse
9 PM- SVANidhi M/o Housing & Prime Minister Street Vendor's  Atma Nirbhar Nidhi (PM S
Scheme Urban Affairs June 01, 2020 to provide collateral free working cap
vending in urban areas, to
resume their businesses which were adversely affected due to COVI
The details of the scheme is at the website:https://pmsvanidhi.mohua
10 Deendayal M/o Housing & To reduce poverty and vulnerability of the urban poor households b
Antyodaya Urban Affairs gainful self employment and skilled wage employment oppo
Yojana - appreciable improvement in their livelihoods on a sustainable bas
National Urban grassroots level institutions of the poor. The mission would aim at p
Livelihoods with essential services to the urban homeless in a phased manner. T
Mission (DAY- is https://nulm.gov.in/
NULM)
11 Prime Ministry of Prime Minister’s Employment Generation Programme (PMEGP),
 Minister’s Micro, Small & linked subsidy programme aimed at generating self-employme
Employment Medium establishment of micro-enterprises in the non-farm sector by helpi
Generation Enterprises unemployed youth. The details can be seen from the website: htt
Programme ministers-employment-generation-programme-pmegp
(PMEGP)
12 Pradhan Mantri Ministry of Pradhan Mantri MUDRA Yojana (PMMY) is a scheme launche
MUDRA Finance Minister on April 8, 2015 for providing loans up to 10 lakh to th
Yojana small/micro enterprises. These loans are classified as MUDRA lo
(PMMY) loans are given by Commercial Banks, RRBs, Small Finance Bank
borrower can approach any of the lending institutions mentioned
through this portal www.udyamimitra.in . Under the aegis of PMM
three products namely 'Shishu', 'Kishore' and 'Tarun' to signif
development and funding needs of the beneficiary micro unit / entre
reference point for the next phase of graduation / growth. The
is https://www.mudra.org.in/
 

13 Pradhan Mantri Ministry of Skill Pradhan Mantri Kaushal Vikas Yojana (PMKVY) is the flagship sche
Kaushal Vikas Development Development and Entrepreneurship (MSDE) implemented by National Sk
Yojana and (NSDC). The objective of this Skill Certification scheme is to enable Ind
(PMKVY) Entrepreneurship relevant skill training that will help them in securing a better livelihood. T
at the website: https://www.pmkvyofficial.org/home-page
 

14 National Ministry of Skill National Apprenticeship Promotion Scheme (NAPS) was launc

Apprenticeship Development Government of India to promote the Apprenticeship in the coun
Promotion and incentives, technology and advocacy support. The scheme has the f
Scheme Entrepreneurship viz., (i) Sharing of 25% of prescribed stipend subject to a maximum
(NAPS) per apprentice with the employers and (ii) Sharing of basic training
Rs. 7,500 per apprentice. The details of th
website:https://msde.gov.in/en/schemes-initiatives/apprenticeship
 
Other details of the scheme is also at website: https://www.apprenticesh
  

15 Production- 13 Ministries Hon'ble Finance Minister, Smt Nirmala Sitharaman has announce
Linked Lakh Crores for the Production Linked Incentive (PLI) Schemes
Incentive (PLI) create national manufacturing champions and to create 60 lakh ne
Scheme production of 30 lakh crore during next 5 years. The deta
website: https://www.investindia.gov.in/production-linked-incentiv
16 PM GatiShakti At present 21 PM GatiShakti National Master Plan (PMGS-NMP) was launched
- National Ministries/ providing multimodal connectivity infrastructure to various e
Master Plan for Departments are Committee on Economic Affairs (CCEA) accorded approval for t
multi-modal involved. GatiShakti National Master Plan on 21st October 2021. PM Gati
connectivity approach for economic growth and sustainable development. The
engines, namely, Railways, Roads, Ports, Waterways, Airports, Ma
Infrastructure. The details is at website: https://dpiit.gov.in/logistics-
 
Employment Generation Schemes/ Programmes of Government of India

Page 50:

Underemployment is a measure of the total number of people in an economy

who are unwillingly working in low-skill and low-paying jobs or only part-time
because they cannot get full-time jobs that use their skills.

Underemployment as well as unemployment is counted in U.S. government

reports in order to provide a truer picture of the health of the job market.

KEY TAKEAWAYS

 Underemployment is a measure of employment and labor utilization in

the economy that looks at how well the labor force is being used in
terms of skills, experience, and availability to work.
 It refers to a situation in which individuals are forced to work in low-
paying or low-skill jobs.
 Visible underemployment and invisible underemployment are types of
underemployment.
  Underemployment can be caused by a variety of factors, from
economic recessions to business cycles.
 The unemployment rate is calculated based solely on the labor force,
which does not include persons who are not seeking a job.

Page 74:

What Is the Money Market?

The money market refers to trading in very short-term debt investments. At
the wholesale level, it involves large-volume trades between institutions and
traders. At the retail level, it includes money market mutual funds bought by
individual investors and money market accounts opened by bank customers.

In all of these cases, the money market is characterized by a high degree of

safety and relatively low rates of return.

KEY TAKEAWAYS

 The money market involves the purchase and sale of large volumes of
very short-term debt products, such as overnight reserves or
commercial paper.
 An individual may invest in the money market by purchasing a money
market mutual fund, buying a Treasury bill, or opening a money market
account at a bank.
 Money market investments are characterized by safety and liquidity,
with money market fund shares targeted at $1.
 Money market accounts offer higher interest rates than a normal
savings account, but there are higher account minimums and limits on
withdrawals.
0 seconds of 1 minute, 25 secondsVolume 75%
 

Money Market

Understanding the Money Market

The money market is one of the pillars of the global financial system. It
involves overnight swaps of vast amounts of money between banks and the
U.S. government. The majority of money market transactions are wholesale
transactions that take place between financial institutions and companies.
Institutions that participate in the money market include banks that lend to
one another and to large companies in the eurocurrency and time deposit
markets; companies that raise money by selling commercial paper into the
market, which can be bought by other companies or funds; and investors who
purchase bank CDs as a safe place to park money in the short term. Some of
those wholesale transactions eventually make their way into the hands of
consumers as components of money market mutual funds and other
investments.

Definition of  Treasury Bill

Treasury Bills are short term (up to one year) borrowing instruments of the Government of India
or by a central authority of any country which enable investors to park their short term surplus
funds while reducing their market risk. They are auctioned by the Reserve Bank of India (RBI) at
regular intervals and issued at a discount to face value.

The bill market is a sub-market of the money market in India. There are two types of bills viz.
Treasury Bills and commercial bills. While Treasury Bills or T-Bills are issued by the Central
Government; Commercial Bills are issued by financial institutions.’

T-bills have an advantage over the other bills such as zero risk weightage associated with them.
They are issued by the government and sovereign papers have zero risks assigned to them, High
liquidity because 91 days and 36 days are short term maturity.

Types of Treasury Bills

Treasury Bills are basically instruments for short term (maturities less than one year) borrowing
by the Central Government. Treasury Bills were first issued in India in 1917. At present, the
active T-Bills are 91-days T-Bills, 182-day T-Bills and 364-days T-Bills. The 91-day T-Bills are
issued on a weekly auction basis while 182-day T-Bill auction is held on Wednesday preceding
Non-reporting Friday and 364-day T-Bill auction on Wednesday preceding the Reporting Friday.
In 1997, the Government had also introduced the 14-day intermediate treasury bills. Auctions of
T-Bills are conducted by RBI.

Relevant Questions Regarding Treasury Bills

Who can buy Treasury Bills?
Individuals, Firms, Trusts, Institutions and banks can purchase T-Bills. Treasury bills or T-bills,
which are money market instruments, are short term debt instruments issued by the Government
of India and are presently issued in three tenors, namely, 91 days, 182 days and 364 days.

Are Treasury Bills worth buying?

 Treasury bills are a popular and accessible form of investment. One need not be rich to afford
them, and they are simple and virtually risk-free. Treasury bills have a face value of a certain
amount, which is what they are actually worth

Can the state govt issue treasury bills?

The State governments do not issue any treasury bills. Interest on the treasury bills is determined
by market forces