Meaning, importance and scope of Macroeconomics

Macroeconomics delves into the comprehensive study of economies on a large scale, concentrating on aggregated phenomena
such as national income, inflation, unemployment, and economic growth. It navigates the intricate interplay between various
economic factors to comprehend and predict the behavior of an entire economy.

Meaning: At its core, macroeconomics explores the behavior and performance of an economy as a whole. It scrutinizes factors
influencing economic output, employment rates, inflation, and monetary and fiscal policies. It aims to decipher the mechanisms
governing these elements and their impact on the overall wellbeing of a nation.

Importance: Understanding macroeconomics is pivotal as it aids policymakers, businesses, and individuals in making informed
decisions. It provides insights into how policy changes affect the economy and helps in devising strategies to achieve stable
economic growth, lower unemployment rates, and controlled inflation. By studying macroeconomics, one gains a holistic view,
enabling better comprehension of the functioning of markets and societies.

Scope: The realm of macroeconomics encompasses a broad spectrum. It covers varied domains including fiscal policy
(government spending and taxation), monetary policy (central bank interventions), international trade and finance, economic
growth theories, inflation, unemployment, and the dynamics of aggregate demand and supply. Its reach extends to analyzing
business cycles, understanding the impacts of globalization, and assessing the effects of technological advancements on
economies.

Macroeconomics plays a pivotal role in steering economies towards stability and prosperity. It aids in comprehending the
dynamics of economies, enabling better decision-making by governments, businesses, and individuals. Its scope continuously
evolves, adapting to the ever-changing economic landscape, making it an indispensable tool for navigating the complexities of
the global economy.

Business cycle and it's Phases( growth and fluctuations)

The business cycle illustrates the fluctuation of economic activity within an economy over time. It showcases the rhythmic
pattern of expansions and contractions in production, income, and employment. Typically, the cycle comprises four phases:
expansion, peak, contraction, and trough.
1. Expansion: This phase marks a period of increasing economic activity. It encompasses rising production, heightened
consumer spending, and declining unemployment rates. During an expansion, businesses thrive, investments increase, and overall
economic output ascends.

2. Peak: The peak represents the climax of economic growth within a business cycle. It signifies the highest point of economic
activity before the cycle transitions towards a downturn. At this stage, various economic indicators reach their maximum levels.
Consumer spending may start to plateau, and businesses may experience production limitations due to resource constraints.

3. Contraction: Following the peak, the economy enters a contraction phase. This period witnesses declining economic activity.
Production slows down, businesses reduce investment, and unemployment rates begin to rise. Consumer confidence diminishes,
leading to reduced spending. This phase highlights a decline in economic output and a contraction in the overall economy.

4. Trough: The trough signifies the lowest point of the business cycle. It represents the end of the contraction phase. At this
stage, economic activity bottoms out, and indicators like unemployment rates and production levels reach their lowest points.
However, the trough also marks the turning point where the economy begins to move towards recovery and expansion again.

The graphical representation of the business cycle appears as a wave-like

pattern, with expansions and contractions occurring alternatively. The horizontal
axis typically denotes time, while the vertical axis represents the level of
economic activity. The cycle's upward trend during expansion transitions into a
downward trend during contraction, forming the wave-like representation of the
business cycle.
In the figure above the four phases business cycles are shown. The broken line
represents long time growth trend or potential GDP. It shows rising trend of
growth over a period of time. The figure starts from Trough when the overall
economic activities i.e. level of production and employment are at the lowest level. With increase in the economic activities the
economy moves into Expansion Phase. But expansion phase cannot continue indefinitely, and after reaching Peak, economy
starts contracting i.e. Contraction Phase sets in and continue till it reaches the lowest turning point called Trough. Here cycle
completes and new cycle starts.
Understanding the business cycle and its phases is crucial for policymakers, businesses, and investors to anticipate economic
trends, plan for contingencies, and implement appropriate strategies during different phases of the cycle.

1
Okun's law
Okun's Law describes the relationship between changes in unemployment and economic growth. Proposed by economist Arthur
Okun, it suggests that for every 1% decrease in the unemployment rate, an economy tends to grow around 2% to 3% above its
potential GDP. Conversely, a rise in unemployment by 1% indicates a GDP growth that falls below potential by 2% to 3%. This
law reflects the inverse relationship between unemployment and the output of an economy, highlighting the impact of labor
market conditions on overall economic performance, serving as a guideline for policymakers to gauge economic health and
performance.

Okun's Law represents an empirical observation rather than a fixed rule, suggesting an inverse relationship between a country's
GDP growth and changes in the unemployment rate.However, variations exist among countries due to diverse economic
structures, labor market dynamics, and policy interventions. Factors like labor market flexibility, technological advancements,
demographics, and structural changes impact the sensitivity of GDP growth to changes in unemployment.

National income and it's measurement

Measuring an economy's output involves key indicators like Gross National Product (GNP), Gross Domestic Product (GDP), Net
National Product (NNP), and Net Domestic Product (NDP). GNP quantifies the total value of goods and services produced
domestically by a country's resources, including income earned abroad. NNP adjusts GNP by subtracting depreciation,
showcasing the actual value of production after accounting for the decrease in the value of capital over time.

GDP represents the value of goods and services produced within a country's borders, excluding net income from abroad. Actual
GDP reflects what's truly produced in a given period, while potential GDP indicates the maximum output achievable if all
resources were fully utilized. GNP gap measures the difference between potential GNP and actual GNP, highlighting unused
economic capacity. These measures collectively offer insights into an economy's productivity and performance at different stages
or perspectives, whether accounting for market prices or factor costs.

Three primary methods employed in measuring national income are the income approach, expenditure approach, and value-added
method.

1)The income method,

the national income measured by adding up the pre-tax income generated by the individual and firms in the economy it consist
for income from wages, rent of buildings and land interest on capital, profit and etc. according to this method national income is
equal to the income accruing to the factors of production used in producing the national product. Thus the income method shows
that national income is the sum of all incomes earned by the factors of production.
NI=wages+rent+intrest+profit.

2)Expenditure method,
this method arrives at national income by adding up all the expenditure made on a good and service during a year. Income can be
spend either on consumer goods or investment goods. ThusNI can be derived by summing up all consumption expenditure and
investment expenditure made by all individuals as well as the Government of a country during a year. Y=C+I+G+(X-M)

3) value added method (production approach),

another method of measuring national income is by value added. The difference between the value of material outputs and input
at each stage of production is called the value added. It is the value added by each industry to the raw materials for other goods
and services that it bought from other industries before passing on the product to the next link in the whole chain of production.
The problem of double counting can be avoided by following the value added method because we are estimating only the value
added at each stage of production.

Procation should be taken in estimation of nationalism

● Inputed rent of self occupied houses should be included

● Production for self consumption should be included
● The Sail and purchase of second hand goods should not be included
● Value of intermediate goods should not be counted
● Service of housewife should not be included
● Transfer payment should not be included
● Illegal income should not be included
● Windfall gains should not be included
● Corporation tax should not be separately included
● The sale and purchase of shares and bones should not be included

2
Circular Flow Of Income And Output
The circular flow is the continual circular movement of money and goods in the economy. An economy is composed of four
sectors. They are the household sector, the business sector, the government sector and the foreign sector. The circular flow is a
simplified illustration of the movement of income and output among these sectors.
✓Circular Flow In A Two Sector Closed Economy
In a two-sector economy, the circular flow model illustrates the interconnectedness
between the Household sector and the Business sector, showcasing the movement
of income and output. The Household sector, being the proprietor of factors of
production, supplies factor services to the Business sector while simultaneously
consuming the final output produced by businesses.

The Business sector, utilizing these provided factors of production, generates output
for sale. This mutual relationship establishes a continuous cycle within the
economy, reflecting the flow of income and output between these two essential
sectors.

Within this circular flow, a crucial concept is the occurrence of 'leakages,' such as savings. When households opt to save a portion
of their income, it diminishes the available income for the Business sector. However, equilibrium is achieved when the saved
amount is reinjected into the economy as investments by businesses. This process allows for the resumption of income flow,
maintaining equilibrium in the system.

Furthermore, the equilibrium condition in this simplified model is met when the amount of savings by households equals the
investments made by businesses (S = I). Savings, after passing through financial institutions, re-enter the circular flow as
investment, highlighting the cycle's self-perpetuating nature.
✓Circular Flow In A Three Sector Closed Economy
The government sector is added to the business and household sectors to make it a three sector closed model of circular flow of
income and expenditure. Taxation represents a leakage from the circular flow and government purchases are injections into the f
circular flow.
To finance its expenditures the government collects taxes from households (income tax) and businesses (corporation tax). These
taxes represent money leakages from the circular flow. Government expenditures on goods and services are injections into the
circular flow. In addition, transfer payments paid to households are injections. The government also makes transfer payments to
businesses, called subsidies,
The three sector model is in equilibrium when government expenditure is equal to tax revenues. The condition of equilibrium of a
three sector model is S+T=1+G
•NATIONAL INCOME IDENTITY FORA THREE SECTOR ECONOMY:- The national income of a three sector closed
economy is the sum of domestic expenditure on the goods and services produced by domestic factors of production. The output
of a closed economy is consumed, invested or bought by the government. Thus, the national income identity for a three sector
closed economy is Y=C+I+G where C=consumption, I= investment, G=government spending.

✓Circular Flow In A Four Sector Open Economy

Since the actual economy is an open economy, the foreign sector is added. Exports
generally create income for domestic firms. So they are considered as injections into
the circular flow. On the other hand, imports are leakages from the circular flow.
They are expenditures incurred to purchase goods from foreign countries.
Revenues earned from selling exported goods are injections as spending enters the
circular flow, whereas outlays for imported goods are leakages since expenditures
exits the circular flow. The chart shows the circular flow of the four sector open
economy with saving, taxes and imports shown as leakages from the circular flow
and investment, government expenditure and exports as injections into the circular
flow.
The four sector model is in equilibrium when leakages are equal to the injections.
The condition of equilibrium of a four sector model is S+T+M= I+G+X where;
S=Saving, T = Taxes, M= Imports, I=Investment, G = Government
expenditure, X = Exports
•NATIONAL INCOME IDENTITY FOR A FOUR SECTOR ECONOMY:- The
national income of an open economy is the sum of domestic and foreign
expenditure on the goods and services produced by domestic factors of production.
Thus, the national income identity for an open economy is
Y =C+1+G+(X-M) where; C=consumption, I= investment, G=government
spending, X=exports, M=imports

3
Household Shock and Consumption Smoothing
Household shocks, such as unexpected expenses or income fluctuations, can disrupt financial stability. To manage such shocks,
people employ various strategies. One approach is consumption smoothing, which involves redistributing spending over time to
maintain a consistent standard of living despite income changes. When faced with a shock, individuals might tap into savings,
take out loans, or use credit cards to cover immediate needs, then gradually repay these debts when income stabilizes.
Additionally, some adopt budgeting techniques, like prioritizing essential expenses over
discretionary ones or creating emergency funds to mitigate the impact of unforeseen costs.
Others might seek supplementary income sources, such as freelance work or part-time jobs, to
cushion the financial blow.

Consumption smoothing aids in moderating the effects of shocks by spreading out their impact,
enabling households to navigate unexpected events without drastically compromising their
living standards. By adjusting spending patterns and employing financial tools, individuals aim
to sustain stability amidst uncertain circumstances.

Measuring the Economy: Inflation

Inflation refers to the sustained increase in the general price level of goods and services in an economy, leading to a decrease in
the purchasing power of a currency. It's typically measured through various indices that track the average change in prices over
time.

Two significant types of inflation

(1)Open Inflation:- This occurs when prices rise openly due to factors such as excessive demand, increase in production costs, or
expansionary monetary policies like printing more money, leading to a direct increase in prices.

(2).Repressed Inflation:- Contrary to open inflation, repressed inflation happens when prices are artificially held down by
government intervention or price controls. This could result from subsidies, rationing, or other policies that prevent prices from
reflecting their true market value.

Philips Curve:-
The Phillips curve illustrates the inverse relationship between inflation and unemployment. It suggests that there's a trade-off
between these two factors – when unemployment is low, inflation tends to be high, and vice versa. However, this relationship is
not always consistent due to various economic factors influencing both inflation and unemployment simultaneously.

Inflation Rate and Causes:-

The inflation rate is the percentage change in prices over a specific period. Causes of inflation vary but often include:
1.Demand-Pull Inflation:- Arises when aggregate demand exceeds aggregate supply.
2.Cost-Push Inflation:- Occurs due to increased production costs, such as higher wages or raw material prices.
3.Monetary Inflation:- Stemming from an increase in the money supply.
4.Increase in Public Expenditure:-
5.Increase in Consumer Spending:-
6.Reduction in Taxation:-

Inflation Indices:- Various inflation indices measure price changes in specific baskets of goods and services. Common indices
include:
Consumer Price Index (CPI):- the CPI is a measure that examines the weighted average of prices of a basket of goods and
services which are of primary consumer needs. CPI is calculated by taking price changes for each item in the predetermined
basket of goods and averaging in the based on their relative weight in the whole basket.

The Wholesale Price Index (WPI):- the WPI is another popular measure of inflation, which measures and tracks the changes in
in the price of goods in the stages before the retail level.

Producer Price Index (PPI):- the PPI is a family of indexes that measures the average change in selling price received by
domestic producers of goods and services over time.

GDP deflator:- the GDP deflator is a measure of the change in the annual domestic production due to change in price rate in the
economy. And Hanks it is a measure of the changing nominal GDP and real GDP during a particular year.

In conclusion, inflation is a complex economic phenomenon with diverse causes and measures. Understanding its types, causes,
measurement indices, and the intricate dynamics through concepts like the Phillips curve aids policymakers in navigating and
managing its impact on economies.

4
Microeconomics vs. Macroeconomics: Key Differences
1. Unit of Study:
- Microeconomics: Focuses on individual economic units, such as households, firms, and industries.
- Macroeconomics: Considers the economy as a whole, analyzing aggregated economic indicators.

2. Scope of Analysis:
- Microeconomics: Concerned with individual behavior, examining decisions related to resource allocation, pricing, production,
and market structures.
- Macroeconomics: Analyzes aggregate behavior, studying factors influencing total employment, national income, overall
production, and general price levels.

3. Equilibrium Analysis:
- Microeconomics: Utilizes partial equilibrium analysis to understand interactions within specific markets.
- Macroeconomics: Employs general equilibrium analysis, examining the interrelations among various markets in the entire
economy.

4. Ceteris Paribus Assumption:

- Microeconomics: Often relies on the assumption of 'other things constant' (ceteris paribus) to isolate variables and analyze
specific economic factors.
- Macroeconomics: Typically does not make extensive use of the ceteris paribus assumption due to the complexity of the entire
economy.

5. Given Variables:
- Microeconomics: Considers variables such as total output as given or fixed, focusing on explaining individual production and
consumption decisions.
- Macroeconomics: Treats variables like employment and income among individual units as given, while attempting to
determine the values of these variables at the aggregate level.
Conclusion
Microeconomics and macroeconomics offer distinct approaches to understanding economic behavior. While microeconomics
investigates the decisions of individual economic agents and specific markets, macroeconomics takes a broader view, analyzing
the overall functioning and performance of an entire economy. Together, these branches provide complementary perspectives,
contributing to a comprehensive understanding of economic activities at both micro and macro levels.

The Evolutionary History Of Macroeconomics

The evolutionary narrative of macroeconomics spans significant intellectual shifts that have sculpted our comprehension of
broader economic phenomena. Originating in classical economic thought championed by luminaries like Adam Smith, David
Ricardo, and John Stuart Mill, the focus lay on market dynamics, resource allocation, and laissez-faire economics.

The tumultuous era of the Great Depression triggered a paradigm shift. John Maynard Keynes' pivotal work, "The General
Theory of Employment, Interest, and Money," challenged prevailing views, advocating for government intervention to tackle
economic slumps. This Keynesian revolution emphasized managing aggregate demand, igniting discussions about fiscal and
monetary policy roles in stabilizing economies.

The subsequent era witnessed attempts to fuse Keynesian and neoclassical economics into the neoclassical synthesis, seeking to
harmonize market efficiency with government intervention. Later, monetarists like Milton Friedman emphasized the potency of
monetary policy in controlling inflation and promoting growth, leading to theories of rational expectations.
The modern landscape of macroeconomics is diverse, embracing New Classical and New Keynesian schools and incorporating
behavioral economics and complex systems theory. This dynamic field grapples with understanding financial crises, income
inequality, and sustainable growth, reflecting a continual evolution shaped by theoretical debates and empirical explorations.

Rule of 70
The Rule of 70 is a simple mathematical rule used in macroeconomics to estimate the time it takes for a variable to double in
value based on its growth rate. This rule is particularly applicable in situations involving compound growth.
The formula is: Number of years to double ≈ 70 / Growth rate (%)
For instance, if an economy grows at a consistent annual rate of 7%, you can estimate that it will take approximately 10 years for
the economy's size (or any other relevant variable) to double. This estimation is obtained by dividing 70 by the growth rate of
7%.
The Rule of 70 provides a quick and easy way to estimate the doubling time of an economic variable under the assumption of
constant growth rates. However, it's important to note that in reality, economic growth rates can fluctuate and might not remain
constant over long periods. Therefore, the Rule of 70 is a simplification and approximation rather than an exact predictor of
growth.

5
Consumption smoothing
is a way of managing your spending so that you can consume a relatively constant amount over time, regardless of your income.
This can be done by saving money during periods of high income and using those savings to finance your spending during
periods of low income.
Borrowing can be used to smooth consumption by allowing you to consume more than your
income in one period, and then repay the loan in a future period when your income is higher. This
can be helpful if you have a temporary decline in income, such as if you lose your job or have a
medical emergency.

In the text, Julia is able to smooth her consumption by borrowing money now and repaying it later,
when she will have more income. The interest rate on the loan is the price of borrowing money,
and it represents the opportunity cost of consuming more now instead of later.

The feasible frontier shows the different combinations of consumption now and consumption later
that are possible, given the interest rate and Julia's income. The feasible frontier shifts inward as the interest rate increases,
because the opportunity cost of borrowing increases.

Borrowing can be a useful tool for smoothing consumption, but it is important to use it responsibly. If you borrow too much
money, you may have difficulty repaying your loans, which could lead to financial problems.
Consumption smoothing and patiance
Patience and impatience are two important concepts in economics. Patience refers to the
willingness to delay consumption in order to receive a greater reward in the future. Impatience, on
the other hand, refers to the preference for immediate consumption over future consumption.

The diminishing marginal return to consumption is a concept that states that the additional
satisfaction derived from consuming an extra unit of a good or service diminishes as more of that
good or service is consumed. This is because people tend to become satiated with goods and
services as they consume more of them.

The slope of the indifference curve at a point represents the marginal rate of substitution (MRS) at that point. The MRS is the rate
at which a person is willing to trade one good or service for another. In the case of the indifference curve in Figure 10.3b, the
MRS is 1.5. This means that the person is willing to trade 1.5 units of consumption later for 1 unit of consumption now. This is
consistent with the fact that the person is patient.

The consumption smoothing factor is a number that represents the proportion of current income that a person saves. The
consumption smoothing factor is calculated as 1 / (1 + impatience). In the case of the person in Figure 10.3b, the consumption
smoothing factor is 2/3. This means that the person saves 2/3 of their current income and consumes 1/3 of their current income.
This is consistent with the fact that the person is patient.
Borrowing and Consumption
Julia's borrowing and consumption decisions are influenced by the interest rate and her discount rate. The discount rate is a
measure of how much Julia values an extra unit of consumption now relative to an extra unit of
consumption later. When the interest rate is 10%, Julia's discount rate is also 10%. This means that her
preference for future consumption is the same as her preference for present consumption. As a result,
Julia borrows $58 and consumes $58.
When the interest rate is 78%, Julia's discount rate is still 10%. This means that her preference for
future consumption is still the same as her preference for present consumption. Therefore, Julia still
borrows $58 and consumes $58.

In conclusion, Julia's borrowing and consumption decisions are not affected by the interest rate when
her discount rate is equal to the interest rate.

Investing and consumption smoothing

Investing can smooth consumption by allowing people to save for the future. When people invest, they
are essentially trading off consumption today for consumption tomorrow. This can be a good way to
smooth consumption over time, especially if people are uncertain about their future income. By investing,
people can ensure that they will have enough money to consume in the future, even if their income goes
down. In addition, investing can help people to grow their wealth over time, which can also help to
smooth consumption. For example, if Marco invests his grain in seeds and draft animals, he will be able
to harvest more grain in the future. This will give him more money to consume, both now and in the
future.

6
Central Bank policy and spending
The central bank's policy rate is the interest rate that banks are charged for borrowing money from the central bank. When the
central bank raises the policy rate, it becomes more expensive for banks to borrow money, which means that they will also charge
higher interest rates to their customers. This makes it more expensive for households and firms to borrow money, which can lead
to a decrease in spending.

For example, suppose that Julia has no wealth, but expects to receive $100 one year from now.
If the interest rate is 10%, she can borrow $90 today and have enough money to repay the loan
and have $10 left over next year. However, if the interest rate is 20%, she can only borrow $80
today and will have nothing left over next year. As a result, she is likely to spend less money
today.

In many rich countries, when people borrow it is most often to purchase a car or a home. Loans
for this purpose are readily available even to people of limited wealth because, unlike loans to
purchase food or daily consumption items, mortgage loans purchase a car or house that can be signed over to the bank as
collateral. This insures the bank against default risk. For this reason, an important channel for the effects of the interest rate on
domestic spending in many rich economies is through its effect on home purchases and consumer durables such as automobiles.
The interest rates set by central banks can help to moderate ups and downs in spending on housing and consumer durables, and so
smooth out the fluctuations in the whole economy.

Credit market constraints as a principal-agent problem

A principal-agent problem is a situation in which one party (the principal) hires another party (the agent) to act on their behalf.
The problem arises because the principal cannot perfectly monitor the agent's actions, and the agent may have different incentives
than the principal.
In the context of credit markets, the lender is the principal and the borrower is the agent. The lender wants the borrower to use the
loan money to invest in a project that will generate enough income to repay the loan. However, the borrower may not use the
money in this way, or may not be able to generate enough income to repay the loan.

This creates a conflict of interest between the lender and the borrower. The lender wants to minimize the risk of default, while the
borrower wants to maximize their own profits.

Lenders can try to reduce the risk of default by requiring borrowers to put up collateral, which is property that the lender can
seize if the loan is not repaid. They can also require borrowers to have a good credit history, which shows that they have a history
of repaying loans on time.

However, even with these safeguards, there is still a risk of default. This is why lenders charge interest on loans. The interest rate
is the price of borrowing money, and it compensates the lender for the risk of default.

Inequality between lenders and borrowers

In an economy where some people lend money to others, there will be inequality between lenders and borrowers. This is because
lenders receive interest on the money they lend, while borrowers have to repay the loan with interest. This means that lenders will
end up with more money than borrowers.

The Lorenz curve and the Gini coefficient can be used to measure inequality between lenders and borrowers. The Lorenz curve
shows the cumulative share of income received by the cumulative share of the population. The
Gini coefficient is a measure of inequality that ranges from 0 (perfect equality) to 1 (perfect
inequality).

In the example in the text, the Gini coefficient is 0.57, which means that there is a moderate
amount of inequality between lenders and borrowers. This is because the lenders receive a share of
2/3 of total income, while the borrowers receive a share of 1/3.

Exclusion from credit markets

Not everyone who wants to borrow money can do so. Some people are excluded from credit
markets because they are unable to post collateral or lacking their own funds to finance a project.
This can make it difficult for these people to improve their economic situation. the Gini coefficient
increases to 0.70 when 40 of the prospective borrowers are excluded from credit markets. This shows that exclusion from credit
markets can make inequality worse.

7
 The Multiplier Model
The investment multiplier is a key concept in economics that illustrates the
amplification effect of initial investment on overall economic output. It signifies
the proportional increase in the gross domestic product (GDP) resulting from a
change in investment spending. When an initial injection of investment occurs in
an economy, it stimulates production and income. As businesses expand to meet
increased demand, they hire more workers and purchase additional resources,
subsequently boosting household incomes. This rise in income leads to higher
consumer spending, further fueling the demand for goods and services, thus
creating a cycle of increased economic activity. The multiplier effect quantifies
this process by showing how much the final increase in income surpasses the
initial investment. The formula for the investment multiplier is 1 / (1 - marginal
propensity to consume), where the marginal propensity to consume represents
the proportion of additional income that individuals spend on goods and services.

The Multiplier effect by change in investment is graphically shown here, where the output is shown in x asis and aggregate
Demand is on the y axis.The first-round effect is that the fall in investment cuts aggregate demand by €1.5 billion. But lower
spending also means lower production and lower incomes, and firms will fire workers as a result, leading to a further decline in
spending. Think of credit-constrained households where some members lose their job: they would like to keep consumption
stable, but when their income falls they are unable to borrow enough to sustain that level of consumption, so they reduce their
spending, which leads to further cuts in production and incomes. The consumption equation tells us that this kind of behaviour
leads to a fall in aggregate consumption of 0.6 times the fall in income. The process will go on until the economy reaches point Z.

Following the investment shock, the intercept of the line has moved down by €1.5 billion, causing a parallel shift in the aggregate
demand line. Output has fallen by €3.75 billion, more than the fall in investment of €1.5 billion: this is the multiplier process.

In this case, the multiplier is equal to 2.5, because the total change in output is 2.5 times larger than the initial change in
investment. A multiplier of 2.5 is unrealistically large. As we shall see in the next section, once taxes and imports are introduced
in the model, the multiplier shrinks.
We call the model of aggregate demand that includes the multiplier process the multiplier model⁠⁠.

The consumption function can be expressed as follows( determination of consumption)

The consumption function expresses the relationship between onsumption (C) and income (Y). C = f
(Y)
In the equation C is the dependent variable and Y is the independent variable. Thus propensity to
consume or consumption function is a schedule of the various amounts of consumption expenditure
corresponding to different levels of income.
Keynes postulated a direct and linear relationship between aggregate income and aggregate
consumption expenditure. To Keynes as income increases consumption also increases, but the increase
in consumption is a less than proportionate one compared to the increase in income. In equation form
the consumption function is C=a+bY.
Where C = consumption
Y = income
b = marginal propensity to consume
a = autonomous consumption
Autonomous consumption is the consumption expenditure occurs when income level is zero. Such consumption expenditure not
vary with changes in income. Thus consumption that independently of changes in income is known as autonce usinsumption.
Autonomous consumption is financed by borrowing or using up savings.

Consumption dependent upon changes in income is referred as induced consumption . It's the portion of consumption that varries
with disposable income. a= autonomous consumption bY= induced consumption. The technical attributes of the consumption
function are a) average propensity to consume and b) marginal propensity to consume. The average propensity to consume is the
ratio of total consumption to total income. Mathematically APC = C/Y. While the marginal propensity to consume is the ratio of
change in total consumption to change in total income MPC = ∆C/∆Y.

The Saving Function

The saving function shows the level of saving corresponding to level of disposable income. As disposable income increaseslevel
of saving also increases. Thus the relationship between savingand disposable income is positive. S = f (Y). S= Y-C.
If disposable income equals consumption plus saving, the saving function can be derived with the help of the consumption
function

8
Y=C+S since C = a +bY
Y = a+bY + S
Y - bY = a+S
Y (1-b) = a+S
S = -a+(1-b) Y
The Average Propensity to Save is the ratio of total savings to total income. Mathematically, APS=S/Y.The Marginal Propensity
to Save is the ratio of the chang in total saving to the change in total income. Mathematically MPS = ∆AS/∆AY.

Investment function
in Keynesian theory of income determination, investment does not vary with change in income. In other words, in Keynes
‘income-expenditure analysis investment is treated as autonomous of income, that is,
investment does not change with a change in the level of income.Investment is the
addition to the existing stock of real capital to assets .The amount of investment in the
Keynesian analysis is aoociated with various levels of income. This gives us the concept
of propensity to invest or the investment function. I=(f)Y. API is the ratio of total
investment to the total income. MPI is the ratio of change in investment to change in
income.Investment dependent upon changes in income is as induced
investment.Investment determined independently of changes in income known as
autonomous investment

Keynsian model of income determination( cross model)

According to keynes, there can be diffrent sources of national income. Such as government foregin trade, individual, buisness and
trusts. For determining nationl income keynes had devided the diffrent sources of income into for secters namely, household
sector, buisness sector, government sector and foregin sector.

He prepared three models of for the determination of national income. Two sector model, of economy involves households and
business only.while, three sector model added government to the list. On the other hand four sector model contains household,
business, government and foreign sector.According to Keynes the determination of level of national income is based on two
major factors,Aggregate Supply and Aggregate Demand of goods and services.

Aggregate Supply (AS) can be defined as the total value of goods and services produced and
supplied at a particular point of time. It comprises consumer goods as well as producer goods.
The Keynesian AS curve is drawn based on an assumption that total income is equal to total
expenditure.According to Keynes theory of national income determination, the aggregate income
is always equal to consumption and savings.Aggregate Income = Consumption(C) + Saving
(S). The AS curve is also named as Aggregate Expenditure (AE) curve. So it's an 45° stright line
from origin.

Aggregate Demand refers to the effective demand that is equal to the actual expenditure. AD
involves two concepts, namely, AD for consumer goods or consumption (C) and aggregate
demand for capital goods or investment (I). AD = C + I + G +(X-M) . Therefore, AD schedule is also termed as C+I schedule.
According to Keynes theory of national income determination in short-run investment (I) remains constant throughout the AD
schedule, while consumption (C) keeps on changing. Therefore, consumption (C) acts as the major determinant or function of
income (Y).

➔ Fiscal and monetary policy and ISLM CURVE( page 145)

➔ Crowding in and crowding out ( page 149)
➔ Liquidity trap (153)
➔ Fiscal and monetary policy multipliets (155)(methods to control inflation)
➔ Factors affecting consumption (101)
➔ Equilibrium in the goods and money Market (138)
➔ Households co op with fluctuations (25)

Factors affecting investment

1) Rate of Interest:- Many firms are in need of borrowed funds They make capital purchases for purposes of replacing,
expanding or otherwise modifying their operations. The businessmen are not willing to borrow at a higher rate of
interest. Thus there is an inverse relationship between the rate of interest and the level of investment.
2) State of Business Confidence:- Business confidence is an important factor influencing the propensity to invest. Under
a climate of optimism, the businessmen are willing to invest more.

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 3) Tax Structure:- The private inducement to invest may be affected by changes in the tax structure. The downward
revision of taxes is necessary to stimulate investment.
4) Technology:- Technological changes having a 'capital using' nature will lead to additional investment.
5) Costs of Inputs:- The demand for capital is related to the price of inputs such as materials, fuel, labour etc.
6) Capacity Utilisation:- When the existing plant and equipment are not being fully utilised, a firm is less likely to invest
in new capital goods.
7) Capital Accumulation:- Capital accumulation lowers the rate of profit and volume of investment is adversely affected
8) Population Growth:- Changes in size and composition population also affect the inducement to invest in the long run.
growing population will result in an expansion in investment opportunities.
9) Profit:- Investment is directly related to profit.

CPI and GDP deflator

Inflation is an increase in the level of prices of the goods and services that households buy. It is measured as the rate of change of
those prices. Typically, prices rise over time, but prices can also fall (a situation called deflation). It's important to Measure the
inflation as it's important for the study growth of an economy. Depending upon the selected set of goods and services multiple
types of inflation indicators can be measured. CPI and GDP deflators are widely used in economies to calculate inflation.
The Consumer Price Index measures the general level of prices that consumers have to pay for goods and services, including
the consumption taxes. The basket of goods and services is chosen to reflect the spending of typical household in the economy.
For this reason the change in the CPI or CPI inflation is often considered to measure changes in the cost of living.
The CPI is based what consumers actually buy. The goods and services in the basket of waited according to the fraction of
household spending they account for. The CPI excludes exports but includes imports which are consumed by household in the
home economy.
The GDP deflator is a price index Like the CPI, but it tracks the changes in prices of all domestically produced final goods and
services. Instead of a basket of goods and services the GDP deflator tracks the price changes of the compounds of domestic GDP
that is, of C+I+G+X-M.
The GDP deflator can also be expressed as the ratio of nominal GDP to real GDP. The GDP deflected series is most commonly
used to transform a nominal GDP series into a real GDP series.

Aggregate Demand and Unemployment

Understanding the intricate relationship between aggregate demand and unemployment is pivotal in comprehending the dynamics
of an economy. The amalgamation of the price-setting curve and the production function curve serves as a fundamental
framework in elucidating this connection.
● The supply side (labour market) model: is of the supply side of the economy and focuses on how labour is employed to
produce goods and services. This is called the labour market model (or the wage -setting curve and price-setting curve
model).
● The demand side (multiplier) model: The other is of the demand
side of the economy and explains how spending decisions generate demand
for goods and services and, as a result, employment and output. This is the
multiplier model.
When we put the models together, we will be able to explain how the
economy fluctuates around the long-run labour market equilibri um over the
business cycle. The figure places the multiplier diagram beneath the labour
market diagram. Note that in the labour market diagram, the hori- zontal axis
measures the number of workers, so we can measure em- ployment and
unemployment along it. In the multiplier diagram, output is on the horizontal
axis. The production function connects employment and output, and in this
model, the production function is very simple.

We assume that labour productivity is constant and equal to A (lambda), so

the production function is:
To allow us to draw the demand-side model underneath the supply side
model, we assume = 1, and so Y = N.

Short-term fluctuations in employment are caused by changes in ag- gregate

demand.when employment is below the labour market equilibrium because of
deficient aggregate de- mand, the additional unemployment is called cyclical
unemploy ment. If there is excess demand, above labour market equilibrium, then unemployment is below its equilibrium
level.the economy is initially at labour market equilibri- um at point A with unemployment of 5%. The level of output here is
called the normal level of output. This means that the level of ag gregate demand must be as shown by the aggregate demand
curve labelled 'normal'. Any other level of aggregate demand would pro duce a different level of employment.

Liquidity preference theory

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Liquidity preference theory argues that people prefer to keep assets in a liquid form, such as cash, over less liquid assets like
bonds, stocks, or real estate. By holding liquid assets, individuals, businesses, and investors can better navigate unforeseen
financial and economic changes, especially during crises.
Liquidity preference theory says that interest rates adjust to balance the desire to hold cash against less liquid assets. The more
people prefer liquidity, the higher interest rates must rise to make them willing to hold bonds. Thus, the theory views interest
rates as a payment for parting with liquidity.
Liquidity preference theory, developed by John Maynard Keynes, aims to explain how interest rates are determined. The key
premise is that people naturally prefer holding assets in liquid form—that is, in a manner that can be quickly converted into cash
at little cost. The most liquid asset is money.
According to the theory, interest rates provide an incentive for people to overcome their liquidity preference and hold less liquid
assets like bonds. Bonds provide interest income but are less liquid than cash since they cannot be immediately converted to
money. Thus, the more illiquid a bond, the more incentive people will need in terms of its interest rate.For this reason, the theory
holds that interest rates are determined by the supply and demand for money, which depends in part on this preference.
Three Motives of Liquidity Preference
Keynes argued that the desire for liquidity springs from three motives: the transactions, precautionary, and speculative motives.
❖ Transactions motive: the need to hold cash for day-to-day transactions like buying goods and services. This demand
for liquidity is fairly predictable and correlates with the income and expenses of individuals and firms: the demand for
liquidity increases with income.
❖ Precautionary motive: the urge to hold onto cash as a buffer against unexpected expenses or emergencies. Individuals
might hold onto money or easily accessible funds to cover unexpected medical costs, car repairs, or other financial
demands.
❖ Speculative motive: holding onto cash to take advantage of future investment opportunities not yet available.

Money Market
The money market is the set of markets where different financial assets that occur in the short term are exchanged. These markets
meet the need for short-term borrowing and borrowing by individuals, businesses, or the government.
➢ Money Markets Serve as Wholesale Markets:- Money markets primarily cater to large financial entities,
corporations, and public administrations. These markets usually are not meant for individual retail investors. Instead,
they cater to institutions and entities with substantial financial resources. These participants engage in large-scale
borrowing and lending activities, often involving significant sums of money.
➢ Ensures Minimum Risks:- The money market is known for its minimal risk profile. This is primarily because the
issuers of money market instruments are typically highly creditworthy entities. Government entities, financial
institutions with strong credit ratings, or large corporations often issue these instruments.
➢ Facilitates High Liquidity:- Liquidity is a fundamental characteristic of financial markets. It refers to how quickly and
easily an asset can be bought or sold without causing a significant impact on its price.
➢ Allows Direct Negotiation:- Money markets allow participants to engage in direct negotiations. This means that large
corporations, financial institutions, and government bodies can arrange borrowing and lending transactions directly,
negotiating the terms and conditions that suit their needs.
➢ Provides Indirect Access Through Investment Vehicles:- Mutual funds offer indirect access to the money market for
individual investors through various investment vehicles.
➢ Money Markets are Flexible:- Money market instruments offer flexibility regarding the types of securities and
securities portfolios you can invest in. This diversity reduces risk by spreading investments across various issuers and
securities.

Quantitative methods to control Credit market

★ Bank Rate Policy:- Bank rate is the rate at which the Central bank lends money to the commercial banks for their
liquidity requirements. Bank rate is also called the discount rate. Bank rate is important because it is the pace setter to
other market rates of interest. Bank rates have been changed several times by RBI to control inflation and recession.
★ Open market operations:- It refers to buying and selling of government securities in open market in order to expand
or contract the amount of money in the banking system. This technique is superior to bank rate policy.Purchases inject
money into the banking system while sale of securities do the opposite.
★ Cash Reserve Ratio (CRR):- The Cash Reserve Ratio (CRR) is an effective instrument of credit control. Under the
RBl Act of l934 every commercial bank has to keep certain minimum cash reserves with RBI. The RBI is empowered
to vary the CRR between 3% and 15%. A high CRR reduces the cash for lending and a low CRR increases the cash for
lending.
★ Statutory Liquidity Ratio (SLR):- Under SLR, the government has imposed an obligation on the banks to; maintain a
certain ratio to its total deposits with RBI in the form of liquid assets like cash, gold and other securities.
★ Credit Control Function:- Commercial bank in the country creates credit according to the demand in the economy.
But if this credit creation is unchecked or unregulated then it leads the economy into inflationary cycles. On the other
credit creation is below the required limit then it harms the growth of the economy.

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 ★ Repo and Reverse Repo Rates:- In determining interest rate trends, the repo and reverse repo rates are becoming
important. Repo means Sale and Repurchase Agreement. Repo is a swap deal involving the immediate Sale of
Securities and simultaneous purchase of those securities at a future date, at a predetermined price.

Paradox of thrift
The paradox of thrift refers to a situation in which individual efforts to increase personal savings or reduce spending during
economic downturns can inadvertently exacerbate the overall economic downturn. While saving is a prudent financial behavior
for individuals, if everyone simultaneously increases their savings or reduces spending, it can lead to a decrease in aggregate
demand. This reduction in demand can subsequently lower business revenues, prompting companies to cut production and,
consequently, jobs. As unemployment rises, people's ability to save further diminishes due to decreased income, creating a cycle
where increased thriftiness results in lower overall savings and exacerbates economic challenges. This paradox illustrates the
conflict between individual rational behavior and its unintended detrimental effects on the broader economy during times of
economic distress.

Assets liabilities and networth

Assets are items of economic value that an individual or entity owns, such as cash, investments, property, or equipment.
Liabilities represent obligations or debts owed by an individual or entity to external parties, including loans, mortgages, or unpaid
bills. Net worth, often termed as equity or owner's equity, is the difference between an entity's assets and liabilities. It signifies
the residual value or the ownership interest in an individual's or company's assets after settling all obligations. It's a crucial metric
used to assess financial health, indicating the overall financial position. A positive net worth implies that assets exceed liabilities,
while a negative net worth suggests more liabilities than assets, which could indicate financial distress. Analyzing and managing
assets, liabilities, and net worth helps individuals and businesses in making informed financial decisions, ensuring stability and
growth.

Automatic Stabilizer (120)

IS Curve and factors of shifting (127)

Sovergin Debt Crisis

The European sovereign debt crisis was a period when several European countries experienced the collapse of financial
institutions, high government debt, and rapidly rising bond yield spreads in government securities.The debt crisis began in 2008
with the collapse of Iceland's banking system, then spread primarily to Portugal, Italy, Ireland, Greece, and Spain in 2009, leading
to the popularization of a somewhat offensive moniker (PIIGS). It has led to a loss of confidence in European businesses and
economies.The crisis was eventually controlled by the financial guarantees of European countries, who feared the collapse of the
euro and financial contagion, and by the International Monetary Fund (IMF). Rating agencies downgraded several Eurozone
countries' debts.
Some of the contributing causes included the financial crisis of 2007 to 2008, the Great Recession of 2008 to 2012, the real estate
market crisis, and property bubbles in several countries. The peripheral states’ fiscal policies regarding government expenses and
revenues also contributed.By the end of 2009, the peripheral Eurozone member states of Greece, Spain, Ireland, Portugal, and
Cyprus were unable to repay or refinance their government debt or bail out their beleaguered banks without the assistance of
third-party financial institutions.

Money and wealth

Money refers to a medium of exchange, a unit of account, and a store of value widely accepted in transactions for goods,
services, or debts. It embodies a tangible representation of purchasing power and facilitates trade within an economy. Money
holds a specific, defined value and can be in various forms like coins, banknotes, or digital currency. Its primary function is as a
means of exchange, enabling transactions and economic activities.
Wealth, on the other hand, encompasses the entirety of assets owned by an individual or entity. It extends beyond currency and
includes possessions, investments, property, and resources. Wealth represents the overall abundance of valuable assets, reflecting
the total economic well-being and accumulated resources of an individual or organization. Unlike money, which serves as a
medium of exchange, wealth encompasses a broader spectrum of assets and resources contributing to an entity's financial
prosperity and security.

Objectives of Fiscal Policy

Fiscal policy aims to achieve several macroeconomic objectives through the manipulation of government spending, taxation, and
borrowing. The primary objectives of fiscal policy include:
1. Economic Growth: Stimulating or maintaining economic growth by increasing government spending or reducing taxes
to boost aggregate demand, encourage investment, and foster expansion in production and employment.
2. Price Stability: Controlling inflationary pressures by adjusting government spending and taxation to prevent excessive
demand growth that could lead to rising prices.
3. Full Employment: Promoting job creation and reducing unemployment levels through increased government spending
on infrastructure projects, job training programs, or other initiatives that stimulate employment.

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 4. Income Redistribution: Reducing income inequality by using progressive taxation or social welfare programs to
redistribute wealth and provide assistance to those with lower incomes.
5. External Stability: Balancing international trade and payments by adjusting fiscal policies to maintain a sustainable
level of exports and imports, ensuring stability in the country's external sector.
6. Public Services and Infrastructure: Providing essential public goods and services such as education, healthcare,
infrastructure development, and social security through government spending initiatives.

❖ Financial stimulus refers to deliberate actions taken by governments or central banks to stimulate economic growth
and stability during periods of economic downturn or recession. This intervention involves implementing various
monetary and fiscal policies aimed at boosting consumer spending, investment, and overall economic activity. Fiscal
stimulus involves government spending increases or tax reductions to inject money into the economy, aiming to spur
demand and consumption. Monetary stimulus, on the other hand, involves central banks lowering interest rates,
implementing quantitative easing (buying government securities), or adjusting reserve requirements to make borrowing
cheaper and encourage lending. The goal of financial stimulus is to mitigate economic hardships, promote job creation,
restore confidence, and stimulate economic recovery by increasing liquidity, encouraging investment, and revitalizing
economic growth.
❖ An incomes policy refers to a set of government measures or guidelines aimed at influencing and regulating the levels
of wages, salaries, and incomes across different sectors of the economy. This policy typically involves direct or indirect
interventions to control and manage the growth rate of incomes to achieve specific economic goals, such as controlling
inflation, maintaining price stability, or fostering economic stability. Incomes policies may include wage and price
controls, guidelines for wage increases, or negotiations between employers, employees, and government entities to
determine acceptable income growth rates. The objective is to strike a balance between wage increases, productivity
gains, and overall economic stability to prevent excessive inflation or wage-price spirals that could adversely impact
the economy.
❖ Double-entry bookkeeping is an accounting method that records every financial transaction in at least two separate
accounts, ensuring accuracy and maintaining the balance between assets, liabilities, and equity within an organization's
financial records. Each transaction involves both a debit entry and a corresponding credit entry.
❖ Collateral security refers to assets or property pledged by a borrower to a lender as a form of security against a loan or
credit facility. This collateral serves as a guarantee to the lender that if the borrower fails to repay the loan, the lender
has the right to seize the collateral to recover the outstanding debt. Common types of collateral include real estate,
vehicles, equipment, investments, or valuable assets.
❖ The Keynesian effect, also known as the Keynesian multiplier, is a concept derived from the economic theories of
John Maynard Keynes. It refers to the phenomenon wherein changes in spending (particularly government spending)
have a more significant impact on aggregate demand and national income than the initial amount spent.
❖ A financial crisis, from a macroeconomic perspective, is a severe disruption in the financial system of an economy
characterized by widespread panic, instability, and a sharp decline in asset prices. It often leads to a breakdown in the
functioning of financial institutions, credit markets, and investment activities.
❖ Mpc and Mps unity /MPC represents the proportion of an additional unit of income that individuals or households
spend on consumption. Conversely, MPS represents the proportion of an additional unit of income that individuals or
households save. Given that all income is either spent or saved, the entirety of income must be accounted for by either
consumption or saving. Therefore, the sum of MPC and MPS equals 1. For instance, if MPC is 0.8 (80%) indicating
that 80% of additional income is spent, then MPS would be 0.2 (20%), signifying that the remaining 20% is saved.
Therefore, 0.8 (MPC) + 0.2 (MPS) = 1, illustrating that the total of all income is either consumed (MPC) or saved
(MPS).
❖ Built-in stabilizers are automatic economic mechanisms that work counter-cyclically to stabilize an economy without
the need for explicit government intervention. These stabilizers are inherent in the structure of a country's tax and
transfer systems
❖ Structural unemployment refers to a type of unemployment caused by a mismatch between the skills possessed by
the workforce and the skills demanded by employers within an economy.
❖ In economics, a "boom" refers to a period of significant economic expansion characterized by robust growth in
economic activity, high levels of production, increased consumer spending, rising employment rates, and generally
favorable business conditions. Booms are typically marked by a surge in demand for goods and services, leading to
higher levels of investment, increased business profitability, and often accompanied by a bullish stock market
❖ The multiplier is a concept in economics that quantifies the impact of changes in spending on the overall economy.
Specifically, it measures how much an initial change in spending (such as government expenditure or investment)
influences the total economic output.
❖ A liquidity trap occurs in an economy when prevailing interest rates are very low or near zero, and monetary policy
becomes ineffective in stimulating economic growth or increasing aggregate demand.
❖ The LM curve, in macroeconomics, represents the combinations of interest rates and levels of income where the
money market is in equilibrium
❖ Aggregate supply (AS) represents the total quantity of goods and services that producers in an economy are willing
and able to supply at various price levels over a specific period

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 ❖ A tight money policy refers to a deliberate strategy employed by a central bank or monetary authority to reduce the
money supply in the economy, usually by raising interest rates and implementing other measures to restrict credit
availability. This policy aims to control inflation, curb excessive borrowing, and stabilize the economy. By increasing
interest rates, borrowing becomes more expensive, leading to reduced consumer spending and business investment.
Consequently, the overall money supply diminishes, which helps in managing inflationary pressures and preventing the
economy from overheating. Tightening the money supply can also be used to address currency depreciation and
maintain exchange rate stability. However, while it can help control inflation, a tight money policy might also slow
economic growth and increase unemployment in the short term.
❖ Stagflation is an economic phenomenon characterized by a combination of stagnant economic growth (or recession),
high unemployment, and simultaneous high levels of inflation. This scenario represents an unusual situation where the
economy experiences both inflationary pressures and a slowdown in economic activity.
Traditionally, inflation and unemployment move in opposite directions: when one increases, the other tends to decrease
due to the Phillips curve relationship. However, during stagflation, both inflation and unemployment rise together,
leading to economic challenges.
❖ In economics and accounting, a balance sheet is a financial statement that provides a snapshot of an entity's financial
position at a specific point in time. It outlines the assets, liabilities, and equity of an individual, company, or
organization. The balance sheet follows the fundamental accounting equation: Assets = Liabilities + Equity.
❖ The equilibrium condition in a goods market refers to a state where the quantity of goods demanded by buyers
equals the quantity of goods supplied by producers at a particular price level.If the price is set too high, quantity
supplied exceeds quantity demanded, resulting in a surplus, which may lead sellers to reduce prices to clear excess
inventory. On the other hand, if the price is too low, quantity demanded exceeds quantity supplied, causing a shortage,
which may prompt sellers to increase prices to take advantage of increased demand
❖ Pure impatience, in the context of economics and decision-making, refers to a situation where individuals or economic
agents have a strong preference for immediate consumption or gratification over waiting for future consumption
❖ Capacity utilization rate refers to the percentage of a company's or an economy's production capacity that is currently
being used to produce goods or services. It indicates how much of the available resources and production capabilities
are being utilized at a given point in time.
❖ National accounts refer to a system of recording and summarizing economic activities within a country over a specific
period. These accounts provide a comprehensive overview of a nation's economic performance, including its income,
production, consumption, savings, investments, and expenditures
❖ Effective demand refers to the actual demand for goods and services in an economy that is supported by the ability and
willingness of consumers to purchase those goods and services at prevailing prices. It represents the level of aggregate
demand that results in real transactions in the market.
❖ Bank money refers to the money supply that exists in the form of bank deposits created by the banking system through
various mechanisms. It comprises the money held in checking accounts, savings accounts, and other types of accounts
in commercial banks, savings banks, or credit unions.
❖ Investment, in economics, refers to the expenditure made by individuals, businesses, or governments to acquire or
create assets with the expectation of generating income or returns in the future. It involves committing resources, such
as money, time, or effort, into acquiring or building assets that are expected to increase productivity, generate profits, or
create future benefits.
❖ In economics, the Accelerator principle is a theory that explains the relationship between changes in the level of
investment and changes in the rate of growth of national income or output. It suggests that the level of investment by
firms is influenced by the rate of change in the level of national income or output.
❖

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