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in

1semest
erM.
com Exami
nat
ion,
Febr
uar
y2019

Macr
oEconomi
csf
orBusi
nessDeci
sions

SECTI
ON-
A

1.A)Def ineMul t
ipl
ier
.Giv eanexampl e
Multi
plier-
thi
sterm givestherelati
onbetweentotali
ncomei nducedbygovernmental
spendingandt heorigi
nal amountofmoneyspent .Example-Inaneconomywher e
doll
arsofgov ernmentalwoul dresulti
nahundreddollarsl
essofpr i
vat
einvest
ment,t
he
rat
iooft otal
inducednat i
onalincomet othei
nit
ialexpendi
tureisnegat
ivebutyett
he
multi
pliershouldbeposi t
ive.

B)Whatismeantbypercapi t
aincome?
Percapi
taincomeref
erstotheaverageincomeperheadinthecount
ry.I
tisauseful
aspectt
omeasur et
heeconomi cstandi
ngofthepeopleoft
hecountr
y,whethert
heyare
for
wardorbackwardpercapit
aincomei nconsi
deredasanindexoft
hecountry’
s
economicdevel
opmentoveraperiodoftime.
Percapi
taincome=NationalI
ncome/ popul
ati
on.

C)Whatdoy oumeanbymi xedeconomy ?

I
treferstotheall
thefactor
sofpr oducti
onli
keland,l
abor
,money
,or
gani
zati
onare
owned,
managed, andcontr
oll
edbybot hprivat
eindi
vidual
sandgover
nment
.Busi
nesscar
ried
overforprofi
tandsocial
welfare.

D)Givethemeani ngofDisposabl
eincome.
Theincomel ef
taftert
hepaymentofdirectt
axesfrom personal
incomeiscal
ledas
Disposabl
eIncome.Disposablei
ncomemeansact ual
incomewhi chcanbespenton
consumpt i
onbyindivi
dual
s.Thusitcanbeexpressedas:
DI=PI-
dir
ectTaxes

E)Di
ff
erent
iat
ebetweenmonetar
ypoli
cyandf
iscalpoli
cy.
Thef
oll
owingaret
hedif
fer
encesbet
weenthemonetarypol
icyandf
iscal
pol
i
cy.

Monet
aryPol
i
cy Fi
scal
Pol
i
cy

1.
Impl
ement
edbyt
hecent
ral
bank Setbyt
henat
ional
gov
ernment
.

2.I
tinv
olv
est
hemani
pul
ati
onoft
he I
tinv
olv
eschangi
ngt
hel
evel
ofspendi
ng

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avai
labl
emoneysuppl
ywi
thi
nthe andgov
ernmentt
axat
ion.
economy.

3.Focusesonst
rat
egyofbanks. Rel
atest
oeconomi
cposi
ti
onofanat
ion.

4.Helpsst
abi
l
izet
heposi
ti
onft
he Admi
nist
erst
het
axat
ionst
ruct
ure.
economy.

H)WhatisPublicdebt?
Publi
cdebtref
erstothet otalborr
owi ngsbytheuniongover
nmentwhi chincl
udessuch
i
temsasmar ketloans,specialbearerbonds,tr
easurybil
l
sandsecur
it
iesissuedbythe
reser
vebank.I
talsoincludest heoutstandi
ngexternal
debt.

I
)whatisParadoxoft
hri
ft
?
I
twaspopulari
zedbyt
herenownedeconomistJohnMay nar
dKeynes.Itstat
est hat
i
ndi
vidual
stryt
osavemoreduri
nganeconomi crecessionwhichessenti
all
yleadstoa
f
all
inaggregat
edemandandhenceineconomicgr owth.

J)StatethedriversofEconomi
cGr
owt
h.
a.Capit
al
b.Technology
c.Humanr esources
d.NaturalResources.

SECTI
ON–B

2.Expl
ainbr
ief
lyt
henat
ureandconcept
sofI
ndi
aneconomy
.

Nat
ureofI
ndi
aneconomy
:

 Sincei
ndependenceIndi
ahasbeena'MixedEconomy
'.I
ndia'
slar
gepubl
ic
sector
swereresponsibl
eforr
ender
ingt
hecountrya'
mixedeconomy'f
eatur
e.

 I
ndianeconomyisbasi
cal
lybasedi
nthecontri
but
ionofserv
icesect
or(cur
rent
ly
pr
ov i
des60%shareofGDP)andnearabout53%ofitspopul
ati
onisdependent
ontheAgri
cul
tur
e.

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 Assoonast hetimeispassing,
theshareofAgri
cul
turei
sdecr
easi
ngandshar
e
ofser
vicesectorisi
ncr
easing.Cur
rentl
yIndi
aiscal
ledadevel
opi
ngeconomyof
theworld.

 I
n1956-57,i
ndust
ri
alpol
i
cychangedandlongter
m obj
ect
ivef
ori
ndust
ri
al
dev
elopmentwereadopt
edbyIndi
angovernment.

 Governmenttookmanyst epstoresol
vet
heissue.Thest
epsincl
uded
nat
ional
izati
onofBanks,enactmentofmonopoli
esandrest
ri
cti
vetr
adepr
act
ice
Act
, pov
ertyeradi
cat
ionprogram et
c.

BasicConcept
sofIndianeconomyareasfol
lows;Economicsi
sat oughnuttocr
ack
formany–GDP, GNP,NDP,NNP,Repo,Rev
erseRepo,SLR,CLR,CRAR–t her
earemany
concept
stobeunderst
oodconcept
sare

Nat
ionalI
ncome
Undert
hebr
oadt
opi
cofnat
ional
incomey
oumayheart
ermsl
i
keGDP,
GNP,
NNPet
c.

GDP:Gr ossDomest icProduct(GDP)isthetotalmoneyv al

ueoffi
nalgoodsand
ser
v i
cespr oducedintheeconomi cter
rit
ori
esofacount r
yinagivenyear.Tot
alvalueof
goodsandser vi
cesproducedinIndiafor2014-15isprojectedt
obear ound100lakh
coreIndianrupeesoraround2t ri
ll
ionUSdol l
arsatcurrentmarketpr
ices.Thi
sisthe
val
ueofI ndianGDPwhenexpr essedatcurrentmarketpr i
ce.

GDPstandsfort
otal
val
ueofgoodsandserv
icesproducedi
nsidet
heter
ri
tor
yofI
ndi
a
i
rr
especti
veofwhom pr
oducedi
t–whetherbyIndi
ansorfor
eigner
s.

GNP:Gr
ossNational
Product(
GNP)isthet ot
alval
ueofgoodsandserv
icespr
oduced
byt
hepeopleofacount
ryinagiveny
ear.Itisnott
err
it
oryspeci
fi
c.I
fweconsi
derthe
GNPofI
ndia,i
tcanbeseenthatGNPislesserthanGDP.

Monet
aryPol
icy

Monet
aryPoli
cyrefer
stothepol
icyofthecent
ral
bank.I
nIndi
aReser
veBankofI
ndia
(
RBI)i
sresponsi
bleformonet
arypoli
cy.Repo,
Rever
seRepo,CRR,
SLRetcar
epartof
monet
arypoli
cy.

REPOr at
e:REPOmeansRePurchaseOption–therat
ebywhichRBIgi
vesl
oansto
ot
herbanks.Bankr
e-pur
chaset
hesecur
it
iesdeposi
tedwi
thRBIatt
heREPOrate.
Presentr
atei
s8%.

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ReverseREPOr ate:RBIatt
imesborrowsfrom banksatarat
elowert
hanREPOrat
e,
andthatrateisknownasRev erseREPOrate(now7%) .REPOandRever
seRepoar
etwo
majoroptionsunderLAF(Li
quidit
yAdjust
mentFacili
ty)
.

BankRat e:Bankrateisahigherr at
e, (1%higherthanREPOr at
e)chargedbyRBIwhenit
givesl
oanst ocommer ci
albanks.Pr esentbankrateis9%.Bankr at
eisdiff
erentf
rom
MSFi nthenaturethatBankr ateislongt erm,appli
esforal
lcommer ci
albanksand
therei
snol i
mitati
onlike2per centoft heirr
especti
veNetDemandandTi meLiabi
li
ti
es
(NDTL).

CRR:CRRcor respondstoCashReserv
eRat io.I
tcorrespondst
ot hepercent
ageofli
qui
d
reserveseachbankshavetokeepascashr eservewithRBI(i
ntheircur
rentaccount
s)
correspondi
ngtothedeposit
stheyhave.Bankswi l
lnotgetanyinter
estfor
thesedeposit
s.PresentCRRis4%.

SLR:SLR(Stat
utoryLiqui
dit
yRati
o)correspondstothepercent
ageofl i
quidreser
ves
eachbankshavetokeepascashr eser
vewiththemselvescorr
espondingtothe
deposi
tstheyhave.Bankshavetomandat orykeepreserv
escorrespondingtoSLR
l
ockedwiththemselvesinthefor
m ofgoldorgov er
nmentsecuriti
es.PresentSLRis22
%.Themai ndiff
erencebetweenCRRandSLRi sthatbanksneedt okeepCRRwi thRBI
,
butSLRwiththemselves,butl
ocked.

Fi
scalPol
icy
Fiscalpoli
cyr
efer
stothepoli
cyacti
onsoftheGov ernment.Budget
,tax,
subsidi
es,
expenditur
eetc.f
ormspartofthefi
scal
poli
cy .Youmightneedtounderstandvar
ious
defici
tsli
keFi
scalDef
ici
tandPr i
maryDefi
citaspartofFi
scalPoli
cy.

FiscalDefi
cit(
FD):Thefiscal
defi
citi
sthedif
fer
encebetweenthegovernment
’st
otal
expenditur
eanditstot
alrecei
pts(
excludi
ngborr
owing)
.Inlay
man’sterm FD
correspondstoborr
owingsandotherli
abi
li
ti
es.

3.Ment
ionthemaj
ort
ypesofmul
ti
pli
ers.Br
ief
lyexpl
aint
hesi
gni
fi
canceofi
nvest
ment
mult
ipl
ier
.

Typesofmul tipl
i
ersar easf oll
ows
1.Empl oy
mentMul ti
plier:I
tr ef
er stoty
peofmul ti
pli
erbyKahn’swheret
henumberof
employmenti scr eated,act i
vatedandsuppl i
edfr
om thebaseorpr imar
yjobs.l
et’
s
supposeincosmet icpr oductst hemultipl
ierismeansthatforever
yjobincosmeti
c
productsi
ndust r
yeffectsot herjobs.Generall
y,
thi
smeanst hatifempl oymenti ncr
easesbyonej obincosmeticcompany,t
henot
her
j
obsar ecreatedthroughoutt heeconomy .

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2.FiscalMul t
ipl
ier
:Itsrefer
ring tot hatt ypeofmul ti
pli
erwher ean incr
ementof
governmentspendingtendstol eaveal argerimpactont henationali
ncome(GDP) .
The
Mechanism usedinthi
scasei st hataniniti
alincrementofspendingbytheGOVTl eads
toincreaseconsumpt i
onwi l
lmakeani ncomeofanot herandhencef urt
herincr
ease
thelevelofexpendit
urethatresul t
sinanov eralli
ncr
easei nnati
onalincomeoft he
country
.

3.MoneyMul ti
pli
er:MoneyMul ti
pli
eri sgener all
ytheamountofmoneyt hatbanks
generatewi t
heachdol larofr eserves.Reser vei stheamountofdeposi tthatbanks
reserveforal lther eserv ethatwant st oreserv einthebankt hant olend.Themoney
mul t
ipl
ierist herati
oofdeposi tstor eservesint hebankingsystem.thehigherreser
ve
rati
o,thet ighterwillbet hemoneysuppl y
,whi chwi l
lresultl
esserexcessreserveand
wouldbel owermul tipl
ieref f
ectf oreverydollardeposited.Thelargert
hemoneysuppl y,
thelowert her eser
v er equirement swhi chmeansmor emoneyIbei nggener at
edfor
everydollardeposi t
ed.

4.I
ncomeMul t
ipli
er:Aninject
ionofinvest
mentwillul
ti
matel
yresultmanyti
meshigher
i
ncreaseint
hei ncomeofani ndi
vidualortonati
oncausedbyt hatini
ti
ali
nvest
ment.
Thatiswhyi
t’
scalledincomemul t
ipli
eratthesametime.

5.Negativ
e/Rev
erseMul t
ipl
ier
:Thenegati
vemult
ipli
erref
erstosuchsi
tuati
oninthe
economywhereami nordecl
ineini
nvest
mentwi
l
ltriggerahugedecl
i
neinthebusi
ness
acti
vi
ty.

6.Taxmul t
ipl
iercanbet houghtinnegativeordownwor dmulti
pli
er becauseifan
i
ncrease in governmentspending leads in everl argeri
ncr
ease in GDP,then a
contr
adi
ctor
ycasewouldbeani ncreaseintax,decreasingGDPorspending.

SI
GNIFICANCEOFINVESTMENTMULTI PLIER:
Aninvest
mentmulti
pli
errefer
stotheconceptthatanyi
ncreasei
npubli
corpri
vat
e
i
nvest
mentspendi
nghasamor ethanproport
ionat
eposit
iveimpactonaggr
egat
e
i
ncomeandthegeneraleconomy.

I
mpor
tanceofmul
ti
pli
erar
easf
oll
ows:

1)Investment:Themul ti
pli
ertheor
yhighl
i
ght
stheimpor t
anceofinv
estmenti
nincome
andempl oymentt heor
y.Sincetheconsumpt
ionfuncti
onisstabl
eduri
ngtheshortr
un
fl
uctuati
onsinincomeandempl oymentar
eduetofluct
uati
onsint
herat
eofinvest
ment.

2)Tr
adecycle:Asacoroll
arytot
heabov e,whentherearef
luct
uati
onsint
hel
evelof
i
ncomeandempl oymentduet ovari
ati
onsi nther at
eofinvestment
,themul
ti
pli
er
pr
ocesst
hrowsaspotl
ightonthedi
ff
erentphasesofthetr
adecycl
e.

3)Saving–InvestmentEqual
it
y:Italsohelpsinbr
ingi
ngtheequalit
ybetweensav ing
andinvest
ment.Ifther
eisadi
vergencebetweensav
ingandinvestment,
andincreasein
i
nvestmentleadst oar isei
nincomev i
at hemulti
pli
erprocessbemor et hant he

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i
ncr
easei
nini
ti
ali
nvest
ment

4)Formulat
ingofEconomicpolici
es:Themul
tipl
i
erisanimport
antt
oolinthehandsof
modernstat
esinformulat
ingeconomicpol
ici
es.Thusthi
spri
nci
plepr
e-supposesst
ate
i
nter
venti
onineconomicaffai
rs.

5)Tocontroltradecycl
es:Thestatecancontrolboomsanddepressi
oninatradecycl
e
onthebasisoft hemulti
pli
ereff
ectoni ncomeandempl oyment
.Whent heeconomyis
exper
ienci
ng infl
ati
onar
ypr essures,the st
ate can cont
rolt
hem bya r educt
ion i
n
i
nvestmentwhi ch l
eadst o cumulati
vedeclineinincomeand empl oymentviathe
multi
pli
erprocess.

6)Def i
citFinancing:The multi
pli
erpr inci
ple hi
ghl
ight
st he i
mportance ofdef i
cit
fi
nanci
ng.When t he economy isr eel
ing undera state ofrecession increased
gover
nmentspendi ngthroughpubl
icinvestmentprogr
ams, cr
eat
esabudgetdef i
citand
hel
ps in expanding income and empl oymentby mul ti
pli
ertimes ini ncrease in
i
nvestment.

4)Whati sinfl
at i
on?Whatar ethefi
scalmeasur estocont rolit
?Explai n.
I
nf l
ationi
saquant i
tat
ivemeasureoft herateatwhi
cht heav eragepricelevelof
abasketofsel ectedgoodsandser vi
cesi naneconomyi ncreasesov eraper i
odofti
me.
I
tist heconstantrisei
nt hegener
allevelofpri
ceswher eauni tofcurrencybuy sl
ess
thanitdidinpriorperi
ods.Oftenexpressedasaper centage,infl
ati
oni ndi
catesa
decreaseinthepur chasingpowerofanat ion’
scurr
ency .

Fiscalmeasurest
ocont r
oltheinfl
ati
onareasfol
lows:
Monet ar
ypolicyalone i
si ncapabl
e ofcontr
oll
i
ng infl
ati
on.Itshoul
dt her
efor
e,be
supplementedbyfiscalmeasures.Fi
scalmeasuresarehighl
yeff
ecti
veforcontr
oll
i
ng
gov er
nmentexpenditur
eper sonalconsumpti
on expendi
tureand pr
ivat
eand public
i
nv estment
.Thepri
ncipalf
iscalmeasuresar
ethefol
lowing

a)Reduct i
oni nunnecessaryExpendi
ture:Thegov ernmentshouldreduceunnecessary
expendi
tureonnon- devel
opmentact i
vi
t i
esinordertocurbinf
lati
on.Thiswillalsoputa
checkonpr i
vateexpendi
turewhichisdependentupongov er
nmentdemandf orgoods
andservices.Butitisnoteasytocutgov ernmentexpendit
ure.Thought hi
smeasur eis
alwayswel comebuti tbecomesdi f
ficulttodist
inguishbetweenessentialandnon-
essenti
alexpenditur
e.Therefor
ethi
smeasur eshouldbesupplementedbytaxat i
on.

b)IncreaseinTaxes.Tocutper sonalconsumpt i
onexpenditur
e,therat
esofpersonal,
corporateandcommodi tytaxesshouldberaisedandev ennewt axesshouldbelev
ied,
butt heratesoft axesshouldnotbesohi ghast odiscour
agesav i
ng,inv
estmentand
production,Ratherthetaxsy st
em shouldprovidelar
gerincent
ivestothosewhosav e,
i
nv estandpr oducemore.

C)Incr
easeinSav i
ngs.Anothermeasurei stoincr
easesavingsonthepartofthe
peopl
e.Thi
swil
ltendtoreducedisposabl
eincomewiththepeople,
andhenceper
sonal

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consumpt i
onexpendi tur
e.Butduet ot her isi
ngcostofl ivi
ng,peoplearenoti na
positi
on tosavemuchv oluntar
il
y.Keynes,therefore,
adv ocatedcompul sor
ysavingsor
whathecal l
ed‘deferr
edpay ment‘ wherethesav erget shi smoneybackaf tersome
years.Forthi
spur pose,t
hegov ernmentshoul df l
oatpublicloanscarryi
nghighratesof
i
nt er
est,st
artsavi
ngschemeswi t
hpri
zemoneyorl ott
eryf orlongperi
odsetc,I
tshould
alsointr
oducecompul soryprovidentf
und,pr ovidentfund-cum- pensi
onschemes,etc,
All
suchmeasur esincreasesavingsandarelikelytobeef fecti
v eincontr
oll
i
nginfl
ati
on.

d)Surpl
usBudgets.Ani
mportantmeasureistoadoptanti
-i
nfl
ati
onarybudgetarypol
icy
.
Forthispur
pose,thegover
nmentshouldgi veupdef i
citfi
nancingandi nsteadhave
sur
plusbudget
s.I
tmeanscollect
ingmoreinrevenuesandspendingless.

e)Publ
icdebt
:Atthesamet i
me, i
tshouldstoprepaymentofpubli
cdebtandpostpone
i
ttosomef ut
uredateti
l
linfl
ati
onarypressurearecont
rol
ledwithineconomy.I
nstead
thegov
ernmentshoul
dborrowmor etoreducemoneysuppl ywi
ththepubli
c.

5.Di
scussv
ari
ousf
act
orsdet
ermi
ningeconomi
cgr
owt
h.

Economicgrowthcanbedefi
nedasanincreasei
nt hecapaci
tyofaneconomyt
o
producegoodsandserv
iceswit
hinaspeci
ficper
iodoftime.

Ineconomics,economicgrowthreferstoalong-t
erm expansi
onintheproduct
ive
potent
ial
oftheeconomyt osat i
sfythewantsofindi
vidualsi
nthesociet
y.Sust
ained
economicgrowthofacount ry’
hasaposi ti
veimpactont henat
ionali
ncomeandl ev
elof
employment,whichfur
therresult
sinhigherli
vi
ngstandards.

Foll
owingar
esomeofthei
mpor
tantf
act
orst
hataf
fectt
heeconomi
cgr
owt
hofa
country
:
I.Economi
cFact
ors:

1.Natur
alr
esour
ces:Count
ri
eswi
thabundantnat
uralr
esourcescandevel
opits
economymuchfast
erwhencomparedt
oacount r
ythatisdefi
cienti
nnat
ural
resour
ces.

2.Capi
talfor
mation:Capi
tal
isl
if
ebloodofall
economicact
ivi
ti
es.Capi
tal
creat
ion
meanscreati
onofcapital
goodsorasset
s.Lar
gerquant
it
yofcapit
alasset
sresult
sint
o
hi
gheroutputandvicever
sa.

3.Technol
ogi
calpr
ogr
ess:Adopt
ionofnewt
echnol
ogy
,changesi
nmet
hodof

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pr
oduct
ion,
impr
ovement
sresul
tsi
ntohi
gherout
putandv
icev
ersa.

4.Divi
sionoflabor
:
I
tmeansr ightmanint
her
ightj
ob.Di
vi
sionofl
aborandspeci
ali
zat
ionl
eadst
ohi
gher
output
.

5.Economi
cstabi
li
ty:
I
tmeansabsenceoffl
uct
uat
ionsi
neconomi
cact
ivi
ti
es.Whi
chr
esul
tint
ohi
gherout
put
.

6.Popul
ati
ongr
owt
h:I
ncr
easei
npopul
ati
onl
eadst
oincr
easei
nout
putandv
icev
ersa.

7.Si
zeofthemarket
:Expansi
oni
nthesi
zeoft
hemar
ketl
eadst
oincr
easei
nout
put
andvi
ceversa.

8.Remov alofmarketimperfect
ions:Remov al
ofmar keti
mperf
ect
ionsli
kelow
eff
ici
encyinproducti
ons,underandmi suseofresources,
monopol
ypracti
cesandpr
ice
ri
gidi
tyr
esultsi
ntoincreasei
nout putandviceversa.

II
.NonEconomicfactor
s:
1.Humanresour
ces
2.Nat
uralr
esour
ces
3.Soci
alandpol
iti
cal
factor
s

1.HumanResour ce:Referstooneoft hemosti

mpor t
antdetermi
nantofeconomic
growt hofacount r
y.Thequal i
tyandquantit
yofavai
lablehumanresourcecandi
rectl
y
affectthegrowthofaneconomy .Thequal
it
yofhumanr esourcei
sdependentonits
skill
s,creat
iveabi
li
ties,
trai
ning,andeducati
on.I
fthehumanr esour
ceofacountryis
wel lski
ll
edandt r
ainedthentheout putwouldal
sobeofhi ghqual
it
y
.
2.Nat ur
alResources:Affectt heeconomi cgrowthofacount r
ytoal argeextent.
Naturalr
esourcesinvol
ver esour cesthatar
epr oducedbynat ureeit
heront helandor
beneaththeland.Theresour cesonl andincl
udepl ants,waterr
esourcesand
l
andscape.Theresourcesbeneat hthelandorunder groundresourcesincl
udeoi l
,nat
ural
gas,metals,
non-metals,andmi neral
s.Thenaturalresourcesofacount rydependon

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thecli
mati
candenv
ironment
alcondi
ti
ons.Count
ri
eshavi
ngplentyofnatur
alr
esour
ces
enjoygoodgr
owtht
hancountri
eswit
hsmal l
amountofnat
uralresour
ces.

Theef f
ici
entut
il
izati
onorexpl
oit
ati
onofnaturalr
esourcesdependsontheski
ll
sand
abil
it
iesofhumanr esour
ce,t
echnologyusedandavail
abil
it
yoffunds.Acount
ryhavi
ng
skil
l
edandeducat edworkfor
cewithrichnat
ural
resourcestakest
heeconomyont he
growthpath.

3.SocialandPoli
ti
calFact
ors:
Playacrucial
rol
eineconomicgrowthofacountr
y.Social
fact
orsi
nvolv
ecustoms,
tr
adit
ions,val
uesandbeli
efs,whi
chcont
ri
butetothegrowthofaneconomytoa
consi
derableext
ent.

Referst
ooneoft heimportantfact
orsthataff
ectthegrowthofaneconomy .
Technol
ogyinvolvesappli
cati
onofscienti
fi
cmet hodsandproduct
iontechni
ques.I
n
otherwords,
technologycanbedef i
nedasnatureandty peoft
echnical
inst
ruments
usedbyacer t
ainamountofl abor.

6.Expl
aini
nbr
ieft
hel
inkagesamongconsumpt
ion,
sav
ingandi
nvest
ment
.

Ani
mpor
tantcont
rov
ersyi
nmacr
oeconomi
csr
elat
est
other
elat
ionshi
pbet
ween

sav
ingandi
nvest
ment
.Manyeconomi
stsbef
oreJ.
M.Key
neswer
egener
all
yoft
hev
iew

t
hatsav
ingandi
nvest
mentar
egener
all
ynotequal
;theyar
eequal
onl
yundercondi
ti
on

ofequi
l
ibr
ium.Besi
des,
theyt
houghtt
hatequal
i
tybet
weensav
ingandi
nvest
menti
s
br
oughtaboutbychangesi
nther
ateofi
nter
est
.Key
nesi
nhi
sfamouswor
k“Gener
al

Theor
yofEmpl
oyment
,Int
erestandMoney
”putf
orwar
dthev
iewt
hatsav
ingand

i
nvest
mentar
eal
way
sequal
.

Thi
sgav
eri
set
oasev
erecont
rov
ersyi
neconomi
csast
owhet
hersav
ingand

i
nvest
mentar
eal
way
sequal
ort
heyar
egener
all
yunequal
.Thi
scont
rov
ersyhasnow
beenr
esol
ved,
andt
her
eisgener
alagr
ee¬mentamongt
heeconomi
stsaboutt
he

cor
rectr
elat
ionshi
pbet
weensav
ingandi
nvest
ment
.

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I
nor
dert
oobt
aint
hesav
ing,
wehav
eonl
ytodeductt
heconsumpt
ionexpendi
tur
efr
om

i
ncomeandnott
hei
nvest
mentexpendi
tur
e.Whenani
ndi
vi
dual
makesi
nvest
ment

expendi
tur
ehei
sdeemedt
ospendhi
ssav
edi
ncomeoni
nvest
ment
.Fori
nst
ance,
ifa

f
armer
’sannual
incomei
sRs.10,
000andhespendsRs.6,
000onconsumergoodsand
ser
vicesandspendsRs.1,
000ont
heconst
ruct
ionofawel
lf sf
orhi i
elds,
and
anot
herRs.1,
000onbui
l
dingadr
ainagesy
stem f
orhi
sfi
eldsandpr
ovi
dingf
enci
ng,

t
henhi
ssav
ingwoul
dbe10–6=Rs.4t
housands.

Theexpendi
tur
eofRs.2,
000onwel
l
,dr
ainageandf
enci
ngwi
l
lbei
ncl
udedi
nthesav
ing
andwi
l
lnotconst
it
utet
heconsumpt
ionexpendi
tur
e.I
fYr
epr
esent
sthenat
ional
income

ofacount
ryandCt
het
otal
consumpt
ion,
thent
hesav
ingoft
hecount
rywi
l
lbeequal
to

Y–C.Thus,

S=Y–C

Thi
scanbeexpr
essedi
nthef
orm oft
hef
oll
owi
ngequat
ion:

Nat
ional
Income=Consumpt
ion+I
nvest
ment

or

Y=C+I

wher
eYst
andsf
ornat
ional
income,
Cforconsumpt
ionandIf
ori
nvest
ment
.

Theabov
eequat
ionr
epr
esent
sthepr
oduct
ionorear
ningsi
deoft
henat
ional
income.

Thesecondaspectofnat
ional
incomei
stheexpendi
tur
esi
de.Thet
otal
nat
ional
income

canbef
ull
yconsumedbutgener
all
yitdoesnothappenso.I
nact
ual
pract
ice,
apar
tof

t
het
otal
incomei
sspentonconsumpt
ionandt
her
emai
ningpar
tissav
ed.

Fr
om t
hiswegett
hef
oll
owi
ngequat
ion:

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Nat
ional
Income=Consumpt
ion+Sav
ing

Or

Y=C+S

wher
eYst
andsf
ornat
ional
income,
Cforconsumpt
ionandSf
orsav
ing.

I
ntheabov
etwoequat
ions(
i)and(
ii
)iti
scl
eart
hatnat
ional
incomei
sequal
tot
hesum

ofconsumpt
ionandi
nvest
mentandal
soequal
tot
hesum ofconsumpt
ionandsav
ing.

Fr
om t
hisi
tfol
lowst
hat
:

Consumpt
ion+Sav
ing=Consumpt
ion+I
nvest
ment

C+S=C+I

I
nequat
ion(
ii
i)abov
e,si
nceCoccur
sonbot
hsi
desoft
heequat
ion,
weget
:

Sav
ing=I
nvest
ment

or

S=I

Fr
om t
hef
oregoi
nganal
ysi
s,i
tfol
l
owst
hatsav
ingandi
nvest
mentar
edef
inedi
nsucha

wayt
hatt
heyar
enecessar
il
yequal
toeachot
her
.Inequat
ion(
i)i
nvest
menti
sthatpar
t

ofnat
ional
incomewhi
chi
sobt
ainedf
rom t
hepr
oduct
ionofgoodsot
hert
hant
hose

consumedandequat
ion(
ii
)sav
ingi
sthatpar
tofnat
ional
incomewhi
chi
snotspenton

consumpt
ion.

Now,
whensav
ingi
ncr
eases,
iti
mpl
i
est
hatconsumpt
ionwi
l
lbel
ess.Thedecl
i
nei
n

consumpt
ionwoul
dresul
tint
headdi
ti
ont
othei
nvent
ori
esofconsumergoodswi
tht
he

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shopkeeper
sandmanuf
act
urer
s,whi
chwer
enotpl
annedori
ntendedbyt
hem.Thi
s

addi
ti
ont
oinv
ent
ori
es,
thoughuni
ntended,
wil
lrai
set
hel
evel
ofact
ual
inv
est
ment
.

Thusuni
ntendedi
ncr
easei
ninv
ent
ori
eswi
l
lrai
set
hel
evel
ofi
nvest
mentandi
nthi
sway

i
nvest
mentwi
l
lincr
easet
obecomeequal
tot
hegr
eat
ersav
ing.Ont
heot
herhand,
ifi
n

anyy
earsav
ingdecl
i
nes,
itwi
l
lresul
tint
heunpl
anneddecl
i
nei
nthei
nvent
ori
esof

consumergoodswi
tht
het
rader
sandmanuf
act
urer
s.Thi
suni
ntendeddecl
i
nei
n

i
nvent
ori
eswi
l
lmeant
hef
all
inact
ual
inv
est
ment
.Int
hisway
,inv
est
mentwi
l
ldecl
i
net
o

becomeequal
tot
hel
owersav
ings.

Ther
efor
e,sav
ingsandi
nvest
menti
npl
annedorex
-ant
esensegener
all
ydi
ff
erf
rom

eachot
her
.Butt
hrought
hemechani
sm ofchangei
nthei
ncomel
evel
,ther
eist
endency

f
orex-
ant
esav
ingandex-
ant
einv
est
mentt
obecomeequal
.

Wheni
nay
earpl
annedi
nvest
menti
slar
gert
hanpl
annedsav
ing,
thel
evel
ofi
ncome

r
ises.Atahi
gherl
evel
ofi
ncome,
mor
eissav
edandt
her
efor
eint
endedsav
ingbecomes

equal
toi
ntendedi
nvest
ment
.Ont
heot
herhand,
whenpl
annedsav
ingi
sgr
eat
ert
han

pl
annedi
nvest
menti
naper
iod,
thel
evel
ofi
ncomewi
l
lfal
l
.

Atal
owerl
evel
ofi
ncome,
lesswi
l
lbesav
edandt
her
efor
epl
annedsav
ingwi
l
lbecome

equal
topl
annedi
nvest
ment
.Wet
husseet
hatpl
annedorex
-ant
esav
ingandpl
annedor

ex-
ant
einv
est
mentar
ebr
oughtt
oequal
i
tyt
hroughchangesi
nthel
evel
ofi
ncome.

Whenex
-ant
esav
ingandex-
ant
einv
est
¬mentar
eequal
,l
evel
ofi
ncomei
sin

equi
l
ibr
ium i
.
e.,
ithasnot
endencyt
ori
seorf
all
.

I
tist
huscl
eart
hatwher
easr
eal
i
sedorex-
postsav
ingi
sequal
tor
eal
i
sedorex
-post

i
nvest
ment
,int
ended,
plannedorex-
ant
esav
ingandi
nvest
mentmaydi
ff
er;
int
endedor

ex-
ant
esav
ingandi
nvest
menthav
eonl
yat
en¬dencyt
obeequal
andar
eequal
onl
yat

t
heequi
¬li
bri
um l
evel
ofi
ncome.

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Thatt
hepl
annedori
ntendedsav
ingi
sequal
toi
ntendedi
nvest
mentonl
yatt
he
equi
l
ibr
ium l
evel
ofi
ncomecanbeeasi
l
yunder
stoodf
rom Fi
g.8.
3.I
nthi
sfi
gur
e,

nat
ional
incomei
smeasur
edal
ongt
heX-
axi
swhi
l
esav
ingandi
nvest
mentar
e

measur
edal
ongt
heY-
axi
s.

SSi
sthesav
ingcur
vewhi
chsl
opesupwar
dindi
cat
ingt
her
ebyt
hatwi
tht
her
isei
n

i
ncome,
sav
ingal
soi
ncr
eases.I
Iist
hei
nvest
mentcur
ve.I
nvest
mentcur
veI
Iisdr
awn

ashor
izont
alst
rai
ghtl
i
nebecause,
fol
l
owi
ngKey
nes,
ithasbeenassumedt
hat

i
nvest
menti
sindependentoft
hel
evel
ofi
ncomei
.e.
,i
tdependsuponf
act
orsot
hert
han
t
hecur
rentl
evel
ofi
ncome.

I
twi
l
lbeseenf
rom t
heFi
g.8.
5thatsav
ingandi
nvest
mentcur
vesi
nter
sectatpoi
ntE.

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Ther
efor
e,OYi
stheequi
l
ibr
ium l
evel
ofi
ncome.I
fthel
evel
ofi
ncomei
sOY1,
the

i
ntendedi
nvest
menti
sY1Hwher
east
hei
ntendedsav
ingi
sY1L.I
tist
huscl
eart
hatat

OY1l
evel
ofi
ncome,
int
endedi
nvest
menti
sgr
eat
ert
hani
ntendedsav
ing.

Asar
esul
toft
his,
lev
elofi
ncomewi
l
lri
seandathi
gherl
evel
sofi
ncomemor
ewi
l
lbe

sav
ed.I
twi
l
lbeseent
hatwi
tht
her
isei
nincomet
oOY2,
sav
ingr
isesandbecomes

equal
toi
nvest
ment
.Ont
heot
herhand,
ifi
nanyper
iod,
lev
elofi
ncomei
sOY3i
ntended

i
nvest
menti
sY3Kandi
ntendedsav
ingi
sY3J.Asar
esul
toft
his,
lev
elofnat
ional
income

wi
l
lfal
ltoOY2atwhi
chex-
ant
esav
ingandex
-ant
einv
est
mentar
eonceagai
nequal
and
t
husl
evel
ofnat
ional
incomei
sinequi
l
ibr
ium.

7.Expl
aint
hemonet
aryi
nter
medi
ari
esi
nIndi
aneconomi
cgr
owt
h.

Banksdi
rect
lypl
ayani
mpor
tantr
olei
ntheeconomi
cdev
elopmentoft
hecount
ry,
Her
e,

wecanseecer
tai
nspeci
fi
crol
eofbanksasf
inanci
ali
nter
medi
ary
.

1.Self-
employmentprogramme
Employ mentgrowthisasi gnofeconomi cdev el
opment .Fi
nancialInt
ermediari
es,by
provi
ding fi
nance forstart
ing sel
f-
employmentpr ogrammes ar e generat
ing more
producti
onandi ncomeinthecountry.I
nIndia,afterthenati
onal
izati
onofcommer ci
al
banks,anumberofpr ogrammeshav ebeeni nit
iatedbybanksf orself
-employment
schemes.

2.Entr
epreneur i
alDev el
opmentPr ogr ammes(EDPs):
Entr
epreneurialDevelopmentpr ogr ammeshav ebeensuccessful
lyl
aunchedbyv ari
ous
banks.Init
iallythrough Lead Bank Scheme,banks wer e devel
oping employment
opport
uniti
esatt hedi st
rictl
evel.Lat eron,
Servi
ceAreaApproachwasadoptedin1978
bywhi chcer tai
nspeci ficareaswer eall
ott
ed tothebanksf orlaunchi
ng dif
fer
ent
economicpr ogrammesf orthedev elopmentofsuchareas.

3.Integrat
edRuraldevelopmentscheme
Undert hisscheme,fi
nancialinter
medi
ari
eswer efi
nanci
ngsocial
lyandeconomical
ly
depressedpeoplebypr ovi
dingloanst
othem forvar
iouseconomicact
ivi
ti
es.Onethi
rd
ofthel oanwil
lbeasubsi dyandt her
emaini
ngtwo-thi
rdsofthel
oanwillcar
ryalower

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rateofint
erestundert
heinter
estsubsidyschemeofRBI.I
nthi
sway,v
ariouseconomi
c
programmesai medatimprovi
ngruraleconomiccondi
ti
onswer
eunder
taken

4.HousingFinance
Asapar tofimprov i
ngdwell
inghouses,fi
nanciali
nter
medi ar
iesar
epr ovi
dinghousi
ng
l
oans.Theyar ealsoprov
idi
ngrefinanci
ngfaci
l
itytoagenciessuchasHUDCO( Housi
ng
and UrbanDev el
opmentCor porati
on).Thishasenabl ed manyfixed i
ncomegr oup
peopletoav ai
lthehousingloan.Nor mal
ly,t
oabor r
owerundert hisfaci
lit
y,abank
provi
des3-yearaggregat
enetincomeasamaxi mum amountort hecostoft hehouse,
whicheveri
sless.

5.Pr
iori
tySector
AsperRBIgui delines,commer ci
albankshavetopr ovidecert
ainpercentageoftheir
l
endi
ngt opri
oritysect orwhichconsist
sofagri
cul
tureandi t
salli
edactivi
ti
es,suchas
poul
tr
y,dai
ry,etc,cottageindust
ri
es,small
scal
eindustr
ies,smal
lindust
ryandbusiness.

6.BackwardareaDevelopment
Inordertopreventr
egionaldispari
ti
es,fi
nanciali
ntermediari
eshavebeenadvanci
ng
l
oanst oi
ndustri
eswhicharest ar
tedinbackwar dareas.Governmenthasgi
vencer
tai
n
concessi
onsint hef
orm oft axbenefit
st osuchi ndustr
iesandbanksprovi
decheap
l
oanssot hatt
hebackwar dar
eascouldat t
ractmoreindustri
es.

7.Int
roductionofElectr
onicsystem
Comput er
sar ebeingusedbyf i
nancialint
ermediari
esf ormostoftheiracti
vit
iesnow
andtheyar eabletolinkthei
rbranchesthroughanet wor k.Thi
shasresul
tedinqui cker
tr
ansferoff undsbet weencent r
esandt hishashel pedcustomersinr eal
izi
ngt heir
chequesi n a speedymanner .I ti
sf ort hispurpose,t hatMagneti
cInkChar acter
Recogniti
on( MI
CR)chequeshav ebeeni ntr
oduced.

Thecustomercanal somakeuseofHomebanki ngfacil

i
tybyl i
nki
ngt hei
rcomput er
syst
em witht
hebankandi nst
ruct
ionscanbeprov
idedfort
ransf
eroffunds.Thi
sf aci
l
ity
,
i
fdev el
opedthr
oughoutthecount r
y,wil
lnotonl
yhelpinthemov ementoff undsbut
al
soreducethedispari
tyi
ntheint
erestr
ate.

SECTI
ON-
C

1.Cr
it
ical
lyexami
net
hedi
ff
erentappr
oachesadv
ocat
edf
ormeasur
ingt
henat
ional
i
ncome.

Nati
onali
ncomemeasurest
hei
ncomegenerat
edbyacountr
ythr
oughthepr
oduct
ion
act
ivi
ti
esthatar
ecar
ri
edoutwi
thi
nacount
ryduri
ngaspeci
fi
cperi
odofti
me.

Acir
cul
arf
lowofi
ncomeandexpendi
tur
eexi
stswi
thi
naneconomy,wheref
actor
i
ncomeisear
nedf
rom t
hepr
oducti
onofgoodsandser
vices,
andt
heincomeisspent

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onthepurchaseofproducedgoods.Thus,
ther
ear
ethr
eeal
ter
nat
ivemet
hodsof
computi
ngnat i
onal
income.Thisincl
udes:

1.Productmet hod: Accor dingtothismet hodt het otalvalueoffi

nal goodsandser vices
producedi nacount r
ydur ingthey eariscalculatedatmar ketpri
cest ofindouttheGDP
thedat aofallproductiv eactiv
iti
essuchasagr i
cultureproducts,woodr eceivedfrom
forest,miner
alsr eceivedf rom mines, commodi tiest oproducti
onbyi ndustri
esthe
cont r
ibuti
ontopr oduct i
onmadebyt ransportcommuni cati
ontopr oductionmadeby
transportcommuni cationinsurancecompani es, l
awy er,doctor
,teachersetcare
collectedandassessedatmar ketpri
cesonl ythef i
nalgoodsandser vicesareincluded
andt heinter
medi arygoodsandser vicesareleftout .

2.Accordingtothi
smet hodt henetincomepay mentr ecei
vedbyal lci
ti
zensofa
countryinaparti
cularyearar eaddedupt hati
sneti ncomet hataccruetotal lf
actor
sof
producti
onbywayofnetr ent,netwages,neti
nterest,andnetprofit
,arealladded
togetherbuti
ncomer eceiv edi nthefor
m oftransferpaymentsar enotincludedinit.
Thedat apert
aini
ngt oi
ncomear eobtai
nedfrom differ
entsourcesforinstancef orI
T
departmentinrespectofhi ghlyincomegoodsandi ncaseofwor ker
sfrom t hei
rwage
bil
ls.

3.Expendit
uremet hod:Accordingtothismethodthetotal
expendit
ureincurr
edbythe
societ
yinapar ti
cularyearisaddedtogetherandincl
udespersonalconsumption
expendit
urenetdomest i
cinvestment,gover
nmentexpenditur
eongoodsandser vi
ces
andnetf or
eigninvestment.Thisconceptisbasedont heassumpti
ont hatNati
onal
Income=Nat ionalExpendit
ure.

4.Val
ueaddedmet hod:Anothermethodofmeasuri
ngnati
onali
ncomei sthev
alue
addedbyindustr
ies.Thedi
fferencebet
weentheval
ueofmateri
aloutputandi
nputat
eachstageofproducti
onisthev al
ueaddedi
fall
suchdif
fer
encesareaddedupf oral
l
i
ndustri
esintheeconomy .

2.
Discussthevari
ousconcept
sofmargi
nalpr
opensi
tyt
oconsumeandmar
ginal
pr
opensit
yt osav
ewi t
hthehel
pofnumeri
calexampl
esandthegr
aph.

MarginalPropensi
tyToConsume( MPC)
Iti
sdefinedast hepropor
ti
onofanaggr egater aiseinpayt hataconsumerspendson
theconsumpt i
onofgoodsandser v
ices,asopposedt osavingit.Mar
ginalpropensi
tyto
consumei sacomponentofKey nesianmacr oeconomi ctheoryandiscalcul
atedast he
changeinconsumpt i
ondivi
dedbyt hechangei ni ncome.
Formula:
I
tisfoundoutbydi v
idingchangesi nconsumpt i
ontoagiveninchangei n
di
sposablei
ncome.
MPC=changei nconsumpt ion/changei nincome
Thiswemaket hi
sconceptcl earbyt akinganexampl eofletussuppose

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thedisposabl
ei ncomer ai
sesfrom rupees2000bill
ionto3000bi l
li
onand
totheconsumpt ionexpendit
ureincreasefr
om rupees1500- 2000bil
li
on.
Themar ginalpr
opensitytoconsumei s
∆c/∆y
=500/1000=½=0.5
Allt
heconcertofconsumpt i
onf unct
ionarenow expl ai
nedwi t
ht hehelpofschedul e
andadiagram
di
sposable consumpt i
on Average propensi
ty mar ginalpropensi
ty
i
ncome(Y) expenditur
e(C) toconsumeC/ Y) toconsume∆c/ ∆y

A1000 1100 1.
1 0.
9
B2000 2000 1.
0 0.
6
C3000 2600 0.
86 0.
5
D4000 3100 0.
77 0.
3
E5000 3400 0.
68 0.
2
F6000 3600 0.
6 0.
1
G7000 3700 0.
53

From the above schedulet hatwiththe increase i

nt he di
sposabl
eincome,t he
propensi
tyt
oconsumedecr easeandconv er
selywithafalli
nincomethepropensi
tyto
consumeandt hemar gi
nalpropensi
tytoconsumei ncr
ease.Theconsumpti
onschedule
canalsobeexplai
nedwi t
hthehelpofcurvewhi chisgi
venbelow:

Int he abov ef i
gurethe disposabl
ei ncome i s
measur edal ongthehorizontalaxisOXandconsumpt i
onalongthev er
ti
calaxi
sOY. l
et
usnowdr aw45°hel pi
nglinefrom Ot oONi fwet akeanypoi ntonthe45°helpi
ngl i
ne,
i
ncomewi llbeexact l
yequalt o expendi ture.Thecur ve‘AG’r epr
esentthei ncome
consumpt ion schedule,indi
cating thepr opensi tyto consumeratv ari
ouslev el
sof
i
ncome.Atpoi nt’A’whi chi sabov e45°hel pinglineshow st hattheexpenditureis
greaterthani t
’si
ncome
Thisdef i
citinincomecanbeconv ertedi ntoei therfrom borr
owingorf r
om thesaleof
assets.Atpoi ntBconsumpt ionexpendi tureexact lyequaltothedisposabl
eincomeand
thereisneithersavingnotdissaving.thispoi ntisknownasbr eakevenpoint.
From Bonwar dupt oG,thecur veli
esbel owt he45°hel pi
ngl i
ne.Thisshowsthatt he

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consumpt
ionexpendi
tur
eislessthanthedisposabl
eincome.Netsavingi
smeasur
ed
bythedi
stancef
rom t
hepropensi
tytoconsumecurveupto45°hel
pingl
i
ne.

Mar
ginalPr
opensi
tyToSav
e(MPS)

Themostistherat
ioofthechangei
nsavi
ngtot
hechangei ni
ncreasei
tcanalsobe
def
inedastherat
eofchangeinAPSasincomechanges.
Itcanbefoundbychangei
n
savi
ngbychangeinincome(∆S/∆Y)
.

I
tal
sof
oundoutbysubt
ract
ingmar
ginal
propensi
tyt
oconsumef
rom 1.

t
husMPS=1-
MPC

di
sposabl
e consumpti
on NetSav
ing(
S) Average Margi
nal
i
ncome(Y) expendi
tur
e(C) propensi
ty to pr
opensi
ty t
o
save(1-
PC=PS) SAVE(
1-
MPC=MPS

A1000 1100 100 1 0.

1

B2000 2000 000 0 0.

4

C3000 2600 400 0.

14 0.
5

D4000 3100 900 0.

23 0.
7

E5000 3400 1600 0.

32 0.
8

F6000 3600 2400 0.

4 0.
9

From t
heaboveschedulethattheincr
easeintheincome,t
heav eragepr
opensi
tyto
saveandthemarginal
propensi
tytosavealsoi
ncreasesandincomedecreases,t
he
aver
agepropensi
tytosaveandthemar gi
nalpr
opensityt
osaveal sodecr
eases.

I
ntheabov efigur
et hedisposabl
eincomeismeasuredalongtheXaxisandsav i
ng
al
ongtheaxi sY.atpointAt heconsumpti
onexpendit
urers.
1100bil
li
onagainstt
he
di
sposableincomeofRs1000bi l
li
on.Theexpendi
tur
eismor ethant
hedisposable
i
ncome.Ther eisdissavi
ngofRs100bi l
l
ioni
smetei t
heroutofaccumulat
edsav i
ngorby
bor
rowing.Wheni ncomei ncr
easestoRs2000bil
l
ion.

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Atpoi
ntB,consumpti
onisexactl
yequalt
oexpendit
ure.Bist heBreakEv enpoi
ntwher
e
C=Y.f
rom BonwarduptoGpoi nt,
savi
nggoesorincreasi
ngwi t
hincreasesin
di
sposabl
eincome.AGthusisthesavi
ngcurv
ewhi chhasrisenwiththeriseini
ncome.

3.Expl
aininbr
ieft
her
ecentcont
rolmeasur
esi
mposedbycent
ralbankt
oregul
atet
he
MonetarySyst
emsinI
ndia.

Thev ariousmet hodsi mposedbyRBIt ocont r

olCr
edi
tcr eat
ionpowerofcommer cial
bankscan
beclassi fi
edintot wogr oups.i
.e.quanti
tati
veandqual
itati
vecont rol
s.
Quantitativecontrolsaredesignedt oregulat
ethevol
umeofcr editcr
eatedby
commer cialbanks.
Quali
tativ eorselectivemeasuresar edesignedtor
egulatethef l
owofcr edi
tinspecif
ic
uses.
Quantitativecontrols
1)BankRat epolicy :
2)Openmar ketoper ati
ons:
3)Var i
abl ecashr eserverati
o:
a.CRR
b.SLR
c.Repor ate
d.Reser verepor ate

Qual
itativeorsel ect
ivemeasures
1)Mar ginr equir
ement s:
2)Regul ati
onofconsumercr edi
t:
3)CreditRat ioni
ng:
4)Mor al Suasion:
5)Cont r
ol throughdirect
ives
6)Dir
ectact i
on:
7)Publicity:

IQuant
it
ati
vemet
hods:

1.BankRat epol i
cy :
Bankr at
eist herateatwhi chRBIlendsmoneyt othecommer cialbanks.I
tisalsocall
ed
as
discountedr ate.Achangei nt
hebankr at eaff
ectsthecreditcreati
onpoweroft heRBI.
Dur i
ngtheper i
odofI nfl
ati
on,therewill
beexcessmoneysuppl y.Inordertocontrol
money
supplybankr ateisusedasai nstr
ument .Anincreasei
nbankr ateleadstoincr
easein
ratesofinterests,Increaseinrateofinterestl
eadst oi
ncreasei ncostofborrowingand
decreaseindemandf orcr
editfi
nall
ydecr easeindemandf orcr edi
tleadstodecreasein

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moneysupply.Dur
ingtheperiodofdefl
ati
on,therewi l
lbeshor
tageofmoneysuppl y,
an
decr
easeinbankrateleadstodecreaseinrat
eofi nter
est,
decreaseinrat
eofinter
est
l
eadstodecreaseincostofbor r
owingsandincreaseindemandf orcredi
t,i
ncr
easein
demandforcredi
tleadstoincreaseinmoneysuppl y
.

2.Openmar ketoperations:
Openmar ketoperati
onr eferstothesaleandpur chaseofsecur it
iesbyt hecent
ralbank
to
commer ci
albanks.Dur ingt heperiodofinflat
ion,centralbankwi l
l sel
lthesecur
iti
esto
commer ci
albankinor derDur i
ngtheper iodofinfl
ation,centr
al bankwi ll
sel
lthe
secur
it
iestocommer cial bankinor dertocontrolcreditcreat
ionandmoneysuppl y
Duri
ngtheper i
odofdef lat i
on,centralbankwillbuyt hesecurit
iesf rom commercial
bankstoincreasethecr edi tcr
eati
onandmoneysuppl yintheeconomy .

3.Var i
ablecashr eserv er atio:
Variabl
ecashr eserver atior eferst oper cent ageofbankdeposi tsthatt hecommer cial
banksar erequiredtokeepi nt hef orm ofcash.Ther eservebankofI ndi aimposes
mainly2t ypesofr eserv er atio.Vi z.CRRandSLR
(a)Cashr eserveratio:
TheCRRr eferstothatpor tionoft heaggr egat edemanddeposi tswhi cht hecommer cial
banksar erequiredtokeepwi t hRBI .Ar isei nCRRl eadst odecl
inei nthecr editcreation
poweroft hecommer cial banksandf al
l i
nCRRl eadst oincr
easei nthecr editcreation
poweroft heRBI .
(b)Statut
or yli
quidit
yr atio: TheSLRr eferst ot hatpor t
ionoftheaggr egat edemand
depositswhi chthecommer cialbanksar er equi redt okeepwi t
ht hemsel vesinal i
quid
form.Ar i
sei nSLRl eadst odecl ineint hecr edi tcreat i
onpoweroft hecommer cial
banksandf all
inSLRl eadst oi ncreasei nt hecr editcreati
onpoweroft heRBI ,

(
c)Repor
ate:
Repor
atei
sther
ateatwhi
chRBIl
endsmoneyt
othecommer
cial
banks

(d)Rev
erser
epor
ate:
RRRi
sther
ateatwhi
chRBIbor
rowsmoneyf
rom t
hecommer
cial
banks.

I
IQual
it
ati
vemet
hods:

1.Mar ginrequirement s:
Mar gini sthedifferencebet weenthel oanvalueandt hemarketval
ueofthesecur iti
es
offeredbybor rower sagainstloan.
Ar iseinMarginresulti
ntodecreasei
ncr edit
creationandmoneysuppl yi
ntheeconomyanddecr easeinmarginl
eadstoi ncreasein
creditcr eati
onandmoneysuppl yi
nt heeconomy .
Forexampl e:ifthemar ginis30%t hencommer ci
albankslendonly70%ofthemar ket
valueoft hesecur i
ties.Ifi
tisrai
sedt o40%t hentheycanlendonly60%oft hemar ket
valueoft hesecur i
ties.
2.Regul ati
onofconsumercr edit:
Undert hismethodconsumer shav etopaycer t
ain%oft hepri
ceofthedurabl egoodsin

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thefor
m ofdownpay ment,
ther emaini
ngpar tofthepr
iceofthegoodsfi
nancedbythe
bankwhichisrepayabl
ebyconsumeri nInstall
mentsoveraperi
odoftime.I
fRBIwants
tocontr
olt
hemoneysuppl ythenitwill
increasethedownpay ment
amountandincreasethei
nterestrat
esonconsumercr editandvi
ceversa

3.CreditRati
oning:
Rati
oningofcr edi
tisasyst
em underwhicht
hecent
ralbankl
imit
sthetotal
amountof
l
oansandadv ancesorspeci
fi
ccategor
iesofl
oansandadvancesgrant
edby
commer cial
banks.

4.MoralSuasion:
Iti
saconv i
ncingactionandr equestmadebyRBIt othecommer ci
al bankst of ol
lowthe
monetarypoli
cywi t
houtmaki nganydeviat
ions.Itmayintheform ofrequest, appeal
,
and
convi
nci
ngact ionbyt heRBI.Duri
ngtheperiodofInf
lat
ionRBIrequestt hecommer ci
al
banksnottolendmor ecredi
ttospecul
ativ
eandnonessent ialact
ivi
ties.Duringthe
peri
odofdeflationRBIrequestthecommer cial
bankstoprovidemor ecr edi
t.

5.Contr
olthr
oughdirecti
ves:
Centr
albankcanexerci
secontrol
ov ercommerci
albanksthr
oughdir
ecti
vesf
rom ti
me
toti
me.Thesedi
rect
ivesmaybei ntheform ofor
alorwri
tt
enorder
s,stat
ements,
warni
ngsoreventhreats.

6.Directact
ion:
Whenmor alsuasi
onanddi r
ect
ivesfail
s,t
hecentral
bankmakeuseofthi
smethodasa
l
ast
resort.I
twil
ltakedir
ectacti
onagainstbanksbyimposi
ngpuni
shmentsli
kehi
gher
i
nterestonbor r
owings,st
oppageofcr edi
t,del
i
censi
ngoft
hebanksandli
qui
dati
on

7.Publi
cit
y:
Publi
cit
yincl
udespubl i
shingregular
lythestat
ementsofcommer ci
albanksassetsand
l
iabi
li
ti
esreport
sonoper ati
onsandact iv
iti
esofcommercial
banks,Moneymar ket,
banki
ng,publi
cfinance,i
ndustry,agr
icult
ureetc.
.Thi
sinf
ormati
ongivecluesto
commer ci
albankstof or
mul at
etheirownpol i
ces.

4)Whati
sbusi
nesscy
cle?Whatar
eit
sPhases?Expl
aint
hemechani
sm t
oov
ercome
thebusi nesscy cl
e.
Thet erm“ businesscycle”(oreconomiccy cl
eorboom- bustcy
cle)refer
stoeconomy -
wi def luctuationsinproduction,tr
ade,andgeneraleconomicacti
vit
y .Fr
om aconceptual
per spect i
v e,thebusinesscy cl
eistheupwar danddownwar dmov ement sofl
evelsof
GDP( grossdomest i
cpr oduct)andreferstotheperi
odofexpansionsandcont r
acti
ons
i
nt hel evel ofeconomi cactivi
ti
es(businessfl
uct
uations)ar
oundal ong-t
erm gr
owth
trend.

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Phasesofbusi nesscy cle:

1.depression:Depressionisthefir
stoftradecycl
ewhent heeconomi
cact
ivi
tyis
extr
emelylow.Dur i
ngdepr essionallconstr
uct
ionacti
vi
ti
escomet oamoreorless
halt
ingstage.Capitalgoodsindustri
essuffermorethanconsumergoodsi
ndustri
es.
Producerssufferheavylosses, pur
chasingpowerofconsumerislow.

2.Recoveryorrevival:Af
teraperiodofdepression,r
ecoverystart
s,Itisaperi
odwher e
economicacti
viti
esr ecoverf
rom shocks.Recov eryi
stheturni
ngpoi ntofeconomyfrom
depressi
ontoexpansi on.Recoveryper
iodhelpst hebusi
nesspeopl etorestor
ethe
confi
denceandcr eatesthefavorabl
eclimateforbusinessacti
v i
ti
es.Asresultoft
hese
fact
or,busi
nesspeopl etakemor eri
sksandi nvestmore.

3.Prosperi
tyorful
lemployment:Thisstageisalsocall
edasexpansion,t
hepr osper
it
y
stageischaract
eri
zedbyhighlev
el ofoutputandtrade,
highl
evelofemploy mentand
i
ncome, l
argeexpansionofbankcredit
,highdemand, hi
ghlev
elofpurchasingpower,
consumerexpenditur
eetc.

4.Boom orf ul
lemploymentori nf
lati
on:Theprosperi
typhasedoesnotst opatfull
empl oyment.I
tgiv
esthewayt oboom.Busi nessoptimism sti
mulatesf ur
ther
i
nv estmentl
eadingtorapidexpansioninall
businessacti
vi
ties.Atthisstagei
ncr eased
pressureini
nvestmentleadstoincreaseinwagesandpr i
ces.Nopr oducti
veresources
arefacingunemploymentat hi
sstagesav i
ngmustbeequal toinvestment.

5.Recession:I
tistheper
iodwherei
ntheaggregat
elevelofeconomi cacti
vi
ti
esstar
ts
decli
ning.Ther
eisaslowingdownofbusi
nessacti
vit
ies.Af
terreachingthepeakpoi
nt,
demandf orthegoodsdecli
ne,ov
eri
nvest
mentandpr oduct
ioncreatesimbalance
betweensupplyanddemand.

Measur est oControlBusinessCyclesorStabil

izati
onPolici
es:
Vari
ousmeasur eshav ebeensuggestedandputi ntopracti
cefrom t
imetoti
meto
contr
ol fl
uctuati
onsi naneconomy .Theyaim atstabil
i
zingeconomicact
ivi
tysoasto
avoi
dt hei l
l
-eff
ectsofaboom andadepr essi
on.Thef oll
owingthr
eemeasuresare
adoptedf orthi
spur pose.

1.Monet aryPolicy:Monetarypoli
cyasamet hodtocontrolbusinessfluctuationsis
operatedbyt hecentralbankofacountry.Thecentralbankadopt sanumberof
methodst ocont rolt
hequant i
tyandqual
ityofcredi
t.Tocont r
ol theexpansionofmoney
supplyduringaboom, itr
aisesit
sbankrate,sell
ssecurit
iesintheopenmar ket,r
aises
thereserverati
o, andadoptsanumberofsel ecti
vecreditcontr
ol measur essuchas
rai
singmar ginrequirementsandregul
ati
ngconsumercr edit
.Thust hecent r
al bank

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adopt
sadearmoneypolicy
.Bor
rowi
ngsbybusinessandt
radebecomedearer
,di
ff
icul
t
andsel
ect
ive.Ef
for
tsar
emadetocontr
olexcessmoneysupplyi
ntheeconomy.

Tocont r
ol arecessionordepression,thecentr
albankf oll
owsaneasyorcheap
monet ar
ypol i
cybyi ncr
easingther eserv
esofcommer cialbanks.I
treducesthebank
rateandinterestratesofbanks.Itbuy ssecur
it
iesintheopenmar ket
.Itl
owersmar gi
n
requir
ement sonl oansandencour agesbankst olendmor et oconsumers,busi
nessmen,
trader
s,etc.

2.Fiscal Pol i
cy :
Monet arypol icyaloneisnotcapableofcont r
olli
ngbusinesscycles.Itshould,t
herefor
e,
besuppl ement edbycompensat or
yfiscalpol
icy.Fi
scalmeasur esarehi ghl
yeff
ectiv
e
forcont roll
ingexcessivegovernmentexpendi tur
e,personalconsumpt ionexpendit
ure,
andpr i
v ateandpubl i
cinvest
mentdur ingaboom.Ont heotherhand, theyhelpin
i
ncreasi nggov ernmentexpenditur
e,personalconsumpt i
onexpenditureandpr i
vateand
publi
ci nv estmentdur i
ngadepr essi
on.

PolicyduringBoom:
Thef ol
lowingmeasur esareadopteddur i
ngaboom.Dur i
ngaboom, thegov ernment
tri
estor educeunnecessar yexpenditur
eonnon- devel
opmentact i
vi
t i
esi norderto
reduceitsdemandf orgoodsandser vi
ces.Thisal
soput sacheckonpr ivate
expenditurewhichisdependentont hegov er
nmentdemandf orgoodsandser vices.But
i
tisdi f
fi
culttocutgov ernmentexpendi t
ure.Moreover
,itisnotpossibletodi st
inguish
betweenessent ial
andnon- essent
ialgovernmentexpenditur
e.Therefore,thi
smeasur e
i
ssuppl ement edbyt axati
on.

Tocutper
sonalexpendi
tur
e,t
hegov
ernmentr
aisest
her
atesofper
sonal
,cor
por
ateand
commodit
ytaxes.

Thegov ernmentalsof
oll
owsthepol i
cyofhavingasur pl
usbudgetwhent he
governmentrevenuesexceedexpendit
ures.Thisi
sdonebyi ncreasi
ngthetaxr
atesor
reducti
oningovernmentexpendi
tureorboth.Thistendstoreduceincomeand
aggregatedemandt hr
oughthereverseoperat
ionofthemultipher.

Policydur ingDepr ession:

Duringadepr ession,thegov ernmentincreasespublicexpendi t
ure,reducestaxesand
adopt sabudgetdef icitpol
icy.Thesemeasur est endtoraiseaggr egatedemand, out
put
,
i
ncome, employmentandpr ices.Anincreaseinpubl i
cexpendi t
ureincreasesthe
aggr egatedemandf orgoodsandser vicesandl eadstoincreaseini ncomev i
at he
mult i
pher .Thepubl i
cexpendi turei
smadeonsuchpubl icwor ksasr oads,canals,
dams,
parks, schools,hospitalsandot herconstruct
ionwor ks.

Theycr
eatedemandforlabourandt
heproductsofpriv
ateconst
ruct
ioni
ndust
ri
esand
hel
psinrev
ivi
ngthem.Thegov er
nmental
soincreasesit
sexpendi
tur
eonsuchrel
ief

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measuresasunemploy mentinsur
ance,
andothersocialsecur
it
ymeasuresi
nordert
o
sti
mulatethedemandforconsumergoodsindustr
ies.Borrowi
ngbythegover
nmentto
fi
nancebudgetdefi
cit
sutil
izesidl
emoneyl
yingwiththebanksandfi
nanciali
nst
it
uti
ons
fori
nvestmentpur
poses.

5)Expl ai
ni ndetailv ar iouspr obl
emsofEconomi cGr owthandDev elopmentofI ndia
*Introduction:economi csi sgr owingsubj ect.Variouseconomi sthav edev elopedday
numberofnew br anchesf rom t i
met ot i
me.Economi cdev el
opmenti sonesuchnew
branchdev elopedi nt hef irstpar tof20t hcent ury.I tisalsocalledaseconomi csof
growt h and economi cs ofunder dev elopment .Thi s new br anch mai nlydeal s with
dev elopmentandgr owt hpr oblemsofdi ffer
enteconomi cs.Itisasubj ectofr ecent
i
nt erestandspeci alisat ion.Sev eralfactorsl i
kethef irstwor l
dwar1914- 18, t
heRussi an
revolutionof1917. hy peri nflati
onof1920swhi chst ar
tedi nGer many, l
aunchingof
economi cplanningi nUSSRi n1928, GreatDepr essi onof1930swhi chst art
edi nUSA,
thesecondwor l
dWar ,1939- 1945et chav econtributedf orthedev el
opmentoft hisnew
branchofeconomi c.Thef ollowingar et hev ari
ouspr oblemsofeconomi cgr owthand
dev elopmentofI ndia:
1)Consumer ism :gr owt hmayl eadt oconsumer ism byencour agingt hecr eati
onof
whatsomer egardedasar tifi
cialneeds.I ndustriescauseconsumer stodev el
opnew
tasteandpr efer
encesf orgr owt hoccur .

2)Resour ces Depl

eti
on :manyear l
ierpredi
cti
ons ofresour
ce depleti
on such as
ThomasMal thus.I
tmeanst heconsumpt i
on ofa resourcefast
ert han i
tcan be
repl
eni
shed.Resourcedepleti
onismai nl
ycommonl yused inr ef
erencet ofarming
,fi
shi
ng,mining,wat
erusageandconsumpti
onoffossi
l f
uel
s.

3)Env ironment
ali
mpact:isthedet eri
orat
ionoftheenvi
ronmentthroughdepleti
onof
resourcesuchasairwaterandsoil,thedestr
uct
ionofecosyst
em,Habi tatdest
ructi
on,
theext i
ncti
onofwil
dli
feandpolluti
on.Itisdefi
nedasonechangeoranychangear e
dist
urbancet ot
heenvi
ronmentperceivedtobeDelet
eri
ounorundesir
able.

4)Equi
tabl
egrowth:i
tmeansintheeconomytheRi
sei
nli
vi
ngst
andar
dofal
lfami
l
ies
i
thel
psforthegr
owthofeachandever
yindi
vi
dual
.

5)Implicati
onsofgl obalwarming:gl obalwarmi ngandcl i
matechanger eferstoan
i
ncreasei naverageGlobaltemperatures.Itpri
mar i
lycausedbyincreasei
ngr eenhouse
gases.Thei ndi
cator
saret emperatureov er
land,snowcov eronhil
l
s, humi
dit
y,sealevel
,
temperatureoveroceans.

6) Pol i
ci
es t owards economi c stabili
ty : economi c stabil
i
ty enables other
macr oeconomi c object
ives to be achieved such as stabl
e pri
ces and stabl
e and
sustainablegrowth.Italsocreat
est herightenvir
onmentforjobcreati
onandaBal ance
ofpay ment s.Thisislar
gelybecausest abil
it
ycreatescert
aint
yandconf i
denceandt hi
s
encour agesinvestmentintechnologyandhumancapi t
al.

7)Lackoff
inanci
alr
esour
ces:under
capi
tal
i
zat
ioni
soneoft
hekeyr
easonsf
orf
ail
ure

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ofsmallbusinessVentures.Lackoffinanci
alresourcesisamajorpr obl
em forsmal l
companies.Thesmal lcompaniesgenerall
yhavef ourpossi
blesourcesoffundwhi ch
are,
 Int
ernall
ygenerat
edpr of
its
 Overdraf
tandloanf undi
ng
 Additi
onalequi
tyf i
nanci
ng
 Corporatevent
uringCashi sakeyresourcebecauseaswellasbeingprofi
table,
compani esmustbecashgener at
ingtoservi
ce.

8)Managementpr oblems :anygr owing companymustunder take a pr ocess of

managementdev elopmentt oensur ethattheor gani sat i
onhasasui t
ablemanagement
whichwi l
lmeeti t
spr esentandf utureneeds.Thef ol l
owi ngar easmustbeexpl or ed:
 Dev elopmentofexi stingmanagement
 Addi ti
onstot heexi stingmanagement
 Compl ementaryr el
at ionshi
pwi thexter naladv isors
9)I nadequate systems :smal lcompani es par ticularlyi nt he startup phase ar e
character
izedbyanumberofi nf
ormalsy st
emswhi chr elayont hedirectinvolv ementof
themanagement .Maj orar easi nwhichadequacyoft heexi st
ingcont r
olsy st
em shoul d
beexami nedar e:1)Fi nanci alsystem 2)Pr oduct ionsy stem 3) Marketi
ngsy st em.The
processofeconomi cdev elopmenti ndevelopi ngNat ionsi sacompl icatedonesuchas
Indi
ai thasmul ti
plef aces.Manydev el
opi ngNat ionshav econt i
nuedt or emai nas
underdeveloped Nat i
ons f ora l ong time t he pr ocess ofEconomi c Dev el opment
i
nnov ati
onsi scompl i
cated monst ersi n becausemypeopl ephases.Mi nd hel ping
nati
onshav econti
nuedt or emainasandt hedev ilofNat ionsf oralongt imeonapoi nt
ofsev er
alreasons.

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