MACRO ECONOMICS

ASSIGNMENT 1

Q1) Explain the impact of circular flow of money on the following

1. Common Man
2. Banking Sector
3. Secondary Sector

Ans : The circular flow of money is a theoretical concept that illustrates the
continuous movement of money through an economy. It describes the flow of
income and expenditure between different economic agents, primarily
households, businesses, and the government. This cycle repeats as money
circulates through various sectors such as households, businesses,
government, and financial institutions. It demonstrates the interconnectedness
of economic agents and how their activities contribute to a continuous flow of
income and spending, ultimately supporting economic activity and growth.
Impact on Common Man
The circular flow of money serves as an advantage for the common man,
ensuring a smooth exchange of goods and services within the economy.
Individuals receive income from their labour, and as they spend on diverse
goods and services, this expenditure, in turn, transforms into income for
others. This circulation contributes significantly to economic stability, playing a
vital role in sustaining livelihoods.
Impact on Banking Sector
The complex system of the circular flow proves to be of supreme significance
for the banking sector. It not only serves as a passage for the effortless
movement of money but also acts as a central element, conducting the
reasonable balance between savings, investments, and loans. Banks, in this
economic composition, assume a pivotal role, skillfully channeling savings into
spending of productive investments. Their contribution extends further as they
judiciously provide loans to both businesses and individuals, thus becoming
catalyst for economic growth.
Impact on Secondary Sector
The composition of the circular flow proves essential for the survival of the
secondary sector, including manufacturing and industry. The continuous
circulation of money serves as a lifeblood, nurturing a persistent demand for
goods and services. This harmonious exchange not only fuels production but
also propels the expansion of the secondary sector.

Q2) Prepare a diagrammatic explanation showing the function of

Multiplier in the Indian economy?

Ans.

Graphical Representation of the Multiplier

Illustrating the multiplier effect involves examining the Aggregate Demand

(AD) and Aggregate Supply (AS) in the economy. In the graphical depiction, AD,
representing Consumption (C) and Investment (I), intersects with the AS curve
at point E, establishing the initial equilibrium.
With an infusion of additional investment (∆I), the AD curve undergoes a shift,
transforming into AD', now comprising Consumption (C), Initial Investment (I),
and the Incremental Investment (∆I). This shift in AD' results in a new
equilibrium point, denoted as OY1, signifying an augmented level of income.
The significance of the multiplier effect is tangible as the income escalates
from OY to OY1. This graphical representation succinctly captures how a
marginal injection of investment sets in motion a cascade of increased
economic activity, exemplifying the amplified impact of the multiplier in the
economic landscape.