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in
2019questionpaper(BangaloreUniversity)
MacroEconomicsforbusinessdecisions

Section-A
I. Answerany7sub-questions.Eachquestioncarries2marks

a.GivethemeaningofMacroEconomics.
MacroEconomicsisabranchofeconomicsthatstudiestheeconomic
behaviournotofanindividualbuttheeconomicsystemasawhole.If
studiestheoverallconditionsoftheeconomysuchastotalconsumption,
totalnationalincome,aggregatesupplyanddemand,generalpricelevel.

b.WhatdoyoumeanbyNationalIncome?
Nationalincomeisthetotalnetvalueofallgoodsandserviceproduced
withinanationoveraspecifiedperiodoftime.Itrepresentsumofwages,
profits,rents,interestandpensionpaymentsofcitizensofanation.
c.Mentionfourfunctionsofmoney.
1.Primaryfunctions
Mediumofexchange
Moneyasunitofvalue
2.Secondary
functionsStoreofvalue
Moneyasstandardofdeferredpayment
Moneyastransferofvalue
3.Contingentfunctions
Moneyasthemostliquidofallliquid
assetsBasisofcreditsystem
Equaliserofmarginalequalizationandproductivities
MeasurementanddistributionofNationalIncome.

d.WhatisConsumption?
Consumptionmeansthesatisfactionofhumanwantsbyusing
goodsandservices.Inotherwordsconsumptionisnotonlyrelated
withusingofcommoditiesbuttheuseofutilitiesingoodsandservices
inordertosatisfywants.
e.Whatisfiscalpolicy?
Fiscalpolicyreferstothepolicyofgovernmentasregardstaxation,public
debtandpublicexpenditurewithspecificobjectivesinview.Itdefinedas
agovernment’sprogramoftaxationexpenditureandotherfinancial
operationstoachieveNationalgoals.
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f.Whatismarginalefficiencyofcapital?
AccordingtoJMKeynesmarginalefficiencyofcapitalistherate
ofreturnexpectedonnewcapitalassetsoveritslifetime.
g.WhatisAutonomousInvestment?
Autonomousinvestmentistheindependentofthelevelofincomeandisthus
incomeinelastic.Itisinfluencetobuyexogenousfactorinnovation,
inventions,growthofpopulationandlabourforceresearcherswheather
changes,war,revolutionetc.

h.Statetwoobjectivesofmacroeconomics.
a.Highandsustainableeconomicgrowth.
b.Tounderstandtheimportanceofsavings.
c.Equaldistributionofincomeandwealth.
d.Toanalyzingtheeffectsofinflationsanddeflation.

i.Differentiateinflationanddeflation.

Inflation
✔ Inflationistheriseinthegeneralpricelevelofgoodsandservices
inaneconomyoveraperiodoftime.
✔ Ininflationpowerlevelishigh

✔ Ininflationpurchasepriceismore

✔ Moneysupplyhigh

✔ Valueofmoneydecrease
Deflation
✔ Depressionisthefallinthegeneralpricelevelofgoodsandservices
inaneconomyoveraperiodoftime.
✔ Inthefleshandpricelevelislow
✔ Purchasepriceislow

✔ Moneysupplylow

✔ Valueofmoneyishigh

j.Givethemeaningofpublicdebt?
 Publicdebtreferstotheborrowingsofthe
governmenttomeetbudgetdeficits.Itisusedas
aneffectiveinstrumentoffiscalpolicytocontrol
inflationanddeflation.
Sourcesofpublicdebts

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a.Internaldebt-itreferstomoneyborrowingsbythegovernmentof
Indiafromindividualandinstitutionswithinthecountry
b.Externaldebt-itreferstotheborrowingsoftheGovernmentofIndia
fromforeigncountriesandfrominternationalfinancialinstitutions.

Section–B

2.Explainthesignificanceofcreditineconomy?
Significanceofcreditineconomyisasfollows:
1.Todivertcreditfromundesirableandeconomicallessurgentissues
ofmoreoverandeconomicalmoreurgentissues.
2.Tocontrolaparticularsectoroftheeconomywithoutaffectingthe
companyasawhole.Forexampleifspeculativeactivitiesaregoingon
intheeconomyandthecentralbankconsidersthenharmful,itmerge
featuretheexercisestructurecreditcontrol,checktheflowofcreditto
theactivitiesitmayrisethemarginrequirementsforsecuredloansto
thespeculators.
3.Todiscovergeconsumerexpenditureondesirableconsumergoods
financesaidbyhenceinstallationcreditforexampleatthetimeof
inflationthecentralbankmaydecidetodiscourageconsumer
expenditureindurableconsumergoodstopreventthepricesfrom
risingstillhigher.
4.Tocorrectanunfavourablebalanceofpaymentsofthecountryin
durationforstopthiscanbedonebythecentralbankbyproviding
chaptercredittoexportindustrieswithaviewtoexpandingtheexports
ofthecountry.Atthesametimethecentralbankandthediscount
ratesonimportbillswithaviewtodiscouragingtheimportsofgoods
intothecountry.
5.TobringunderthecontrolofCentralBankcreditcreatedbyprivatenon
bankingfinancialinstitution.Themethodsofquantitativecreditcontrol
aregenerallyapplicabletocommercialbanksonly.Theprivatenon
bankingfinancialinstitutionnotcoveredbytheirmethods.Andhead
theyarecreatingquiteasubstantialpositionofthetotalvolumeof
creditinaneconomy.Thecentralbankcanextendincontrolontheir
nonbankingfinancialinstitutionbyrestrictingtothemethodsof
quantitativeorselectivecreditcontrol.
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3.GivetheimportanceofMacroEconomics.
Importanceofmacroeconomicsareasfollows;
1.Tounderstandtheworkingoftheeconomy
Tostudyofmacroeconomicsvariablesisdispensableforunderstandingthe
workingoftheeconomy.Ourmaineconomicproblemrelatedtothebehaviour
oftotalincome,outputemploymentandthegeneralpricelevelinthe
economy.Theirvariablesonstatisticalmeasurable.Therebyfacilitatingthe
possibilityofanalysistheeffectofthefunctioningoftheeconomy.

2.Ineconomicpolicies
Macroeconomicsisextremelyusefulfromthepointofviewof
economicpolicymoderngovernmentespeciallytheunderdeveloped
economicsareconfrontedwithinnumerableNationalproblemsthey
aretheproblemsofourpopulation,inflation,balanceofpayment.
Generalunderproductionetc.Nogovernmentcansolvetheirproblems
intermsofindividualbehaviour.Theuseofmacroeconomicsstudy
Hindisolutionofcertaincomplexeconomicproblemstheyare:

A.Generalunemployment-Deccantheoryofunemploymentis
exerciseinmacroeconomics.Thegenerallevelofemployment
inaneconomydependsuponefficientdemandwhichin
dependsonaggregatedemandandaggregatesupplyfunction
unemploymentiscausedbydeficiencyofeffectivedemand.
B.Nationalincome–Thestudyofmicroeconomicsisvery
importantforutilisingtheoverallperformanceoftheeconomyin
termsofnationalincomewiththeadventofthegreatdepression
of1930isitbecomenecessarytothecausesofgeneralover
productionandgeneralunemployment.
C.Economicgrowth-Theeconomicgrowthisalsostudyin
macroeconomics.Itisonthebasisofmacroeconomicsthata
resourcesandcapabilitiesofaneconomyallevaluatedplan
fortheoverallincreaseinnationalincomeoutput,employment
areframedandimplementedshowstoraisethelevelof
economicdevelopmentofthecountryhasthewhole.

3.Inmonetaryproblems–itisintermsofmacroeconomicsthemonetary
problemscanbeanalysedandunderstoodproperlyfrequencychangesin
thevalueofmoneyinflexionanddeflectionaffecttheeconomyaccurately
thentheycanbecountryactedbyadoptingmonetaryfiscalanddirect
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controlmeasuresfortheeconomywhole.
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4.Businesscycle-Futuremacroeconomicsasanapproachto
economicproblemsstatedafterthegreatdepressionthereits
importanceliesinanalysingthecausesofeconomicfluctuationsand
inprovidingremedies.

5.Forunderstandingbehaviourofindividualunits–Demandsfor
individualproductsdependsuponaggregatedemandinthe
economyunlessthecausesofefficiencyinaggregatedemandor
analysed.Itisnotpossibletounderstandfullythereasonforafallin
thedemandofindividualproducts.Thereasonforincreaseincost
oftheparticularfirmorindustrycan’tbeanalysedwithoutknowing
theaveragecostconsiderationofthewholeeconomythusthestudy
ofindividualunitisnotpossiblewithoutmacroeconomics.

4.Whataretheobjectivesoffiscalpolicy?
Fiscalpolicyreferstothepolicyofgovernmentasregardstaxation,
publicdebtandpublicexpenditurewithspecificobjectivesinview.It
defineshasthegovernmentprogramoftaxationexpenditureandother
financialoperationtoachieveNationalgoals.
Objectivesoffiscalpolicyorasfollows
1.Toachievedesirablepricelevel:Thestabilityofgeneralpricesis
necessaryforeconomicstability.Themaintenanceofadesirablepricelevel
hasgoodeffectsonproduction,employmentandnationalincome.Fiscal
policyshouldbeusedtoremove;fluctuationsinpricelevelsothatideallevel
ismaintained.

2.Toachievedesirableconsumptionlevel:Adesirableconsumptionlevelis
importantforpolitical,socialandeconomicconsiderationcanbeeffected
byexpenditureandtaxpoliciesofthegovernment.Fiscalpolicyshouldbe
usedtoincreasewelfareoftheeconomythroughconsumptionlevel.

3.Toachievedesirableemploymentlevel:Theefficientemploymentlevelis
mostimportantindeterminingthelivingstandardofthepeople.Itis
necessaryforpoliticalstabilityandformaximizationofproduction.Fiscal
policyshouldachievethislevel.

4.Toachievedesirableincomedistribution:Thisdistributionofincome
determinedthetypeofeconomicactivitiestheamountofsavings.Inthis
way,itisrelatedtoprices,consumptionandemployment.
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5.Increaseincapitalformation:Inunder-developedcountriesdeficiencyof
capitalisthemainreasonforunder-development.Largeamountare
requiredforindustryandeconomicdevelopment.Fiscalpolicycandivert
resourcesandincreasecapital.

6.Degreeofinflation:Inunder-developedcountries,adegreeofinflationis
requiredforeconomicdevelopment.Afteralimit,inflationarybeusedtoget
ridofthissituation?

5)WriteanoteonParadoxofthrift.(Repeated2018)

6)Explainanyfiveimportantconceptofnationalincome.
Thereareanumberofconceptsfollowingtomeasurementrelatingtothem
a.Groupdomesticproduct(GDP)
GDPisthetotalvalueofgoodsandservicesproducedwithinthecountry
duringayear.ThisiscalculatedatmarketpriceandisknownasGDPat
marketpricedefineGDPatmarketpriceasthemarketvalueofthe
outputofthefinalgoodsandservicesproducedinthedomesticterritory
ofthecountryduringanaccountingyear.

b.GDPatfactorcost
GDPatfactorcostisthesumofnetvalueaddedbyallwithinthecountry
stopthenetvalueaddedgetsdistributedasincometotheoffactorsof
production,GDPisthesumofdomesticfactorsinconsentfixedcapital
consumption.
GDPatfactorcost=netvalueadded+depreciation.

c.Netdomesticproduct(NDP)
NDPisthevalueofnetoutputoftheeconomyduringtheyear.Someof
thecountry’scapitalequipmentlivesoutorcomebecomesobstacle
eachyearduringtheproductionprocess.Thevalueoftheircapital
conservationissomepercentageofgrossinvestmentwhichisdeducted
fromGDP.Thus
NDP=GDPatfactorcost–depreciation

d.NominalandrealGDP
WhenGDPismeasuredonthebasisofcurrentpriceitiscalledGDPat
currentpriceofnominalGDPontheotherandwhenGDPiscalculated
onthebasisoffixedpriceinsomeyears.ItiscalledGDPatconstant
pricesorrealGDP.
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NominalGDPisthevalueofgoodsandservicesproducedinayear
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andmeasuredintermsofrupeesatcurrentmarketprice
RealGDP=GDPforthecurrentyear=baseyear/currentyearindex

4.PersonalIncome(PI):
PIisthesumofallincomesactuallyearnedbytheindividualsandhouseholds
inacountry
duringoneyear.Itistheamountavailabletothemforspending,payingtaxes,
andsaving
purpose.

5.Disposableincome(DPI):
Frompersonalincomeifwedeductpersonaltaxeslikeincometaxes,personal
propertytaxes
etc..Whatremainsiscalleddisposableincome.
Itisapartofpersonalincomewhichisleftafterthepaymentofpersonaldirect taxes.
DPI=PI–Personaldirecttaxes
Itistheamountavailableforspendingandsavingpurposenotforpayingtaxes.
DPI=consumption+savings

6.Percapitalincome:
Percapitalincomereferstotheaverageincomeperheadofpopulation.
Itiscalculatedbydividingnationalincomebytotalpopulation.
Percapitalincome=nationalincome/totalpopulation

7.Whatarethemeasuresusedtocontrolbusinesscycle?

MeasurestoControlBusinessCyclesorStabilizationPolicies:
Variousmeasureshavebeensuggestedandputintopracticefromtimetotimeto
controlfluctuationsinaneconomy.Theyaimatstabilizingeconomicactivitysoas
toavoidtheill-effectsofaboomandadepression.Thefollowingthreemeasures
areadoptedforthispurpose.

1.MonetaryPolicy:Monetarypolicyasamethodtocontrolbusinessfluctuations
isoperatedbythecentralbankofacountry.Thecentralbankadoptsanumberof File
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methodstocontrolthequantityandqualityofcredit.Tocontroltheexpansionof
moneysupplyduringaboom,itraisesitsbankrate,sellssecuritiesintheopen
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market,raisesthereserveratio,andadoptsanumberofselectivecreditcontrol
measuressuchasraisingmarginrequirementsandregulatingconsumercredit.
Thusthecentralbankadoptsadearmoneypolicy.Borrowingsbybusinessand
tradebecomedearer.

Tocontrolarecessionordepression,thecentralbankfollowsaneasyorcheap
monetarypolicybyincreasingthereservesofcommercialbanks.Itreducesthe
bankrateandinterestratesofbanks.Itbuyssecuritiesintheopenmarket.It
lowersmarginrequirementsonloansandencouragesbankstolendmoreto
consumers,businessmen,traders,etc.

2.FiscalPolicy:
Monetarypolicyaloneisnotcapableofcontrollingbusinesscycles.Itshould,
therefore,besupplementedbycompensatoryfiscalpolicy.Fiscalmeasuresare
highlyeffectiveforcontrollingexcessivegovernmentexpenditure,personal
consumptionexpenditure,andprivateandpublicinvestmentduringaboom.Onthe
otherhand,theyhelpinincreasinggovernmentexpenditure,personalconsumption
expenditureandprivateandpublicinvestmentduringadepression.

PolicyduringBoom:
Thefollowingmeasuresareadoptedduringaboom.Duringaboom,the
governmenttriestoreduceunnecessaryexpenditureonnon-developmentactivities
inordertoreduceitsdemandforgoodsandservices.Thisalsoputsacheckon
privateexpenditurewhichisdependentonthegovernmentdemandforgoodsand
services.Butitisdifficulttocutgovernmentexpenditure.Moreover,itisnot
possibletodistinguishbetweenessentialandnon-essentialgovernment
expenditure.Therefore,thismeasureissupplementedbytaxation.

Tocutpersonalexpenditure,thegovernmentraisestheratesofpersonal,
corporateandcommoditytaxes.

Thegovernmentalsofollowsthepolicyofhavingasurplusbudgetwhenthe
governmentrevenuesexceedexpenditures.Thisisdonebyincreasingthetaxrates
orreductioningovernmentexpenditureorboth.Thistendstoreduceincomeand
aggregatedemandthroughthereverseoperationofthemultipher.

PolicyduringDepression:
Duringadepression,thegovernmentincreasespublicexpenditure,reducestaxes
andadoptsabudgetdeficitpolicy.Thesemeasurestendtoraiseaggregate
demand,output,income,employmentandprices.Anincreaseinpublicexpenditure
increasestheaggregatedemandforgoodsandservicesandleadstoincreasein
incomeviathemultipher.Thepublicexpenditureismadeonsuchpublicworksas
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Theycreatedemandforlabourandtheproductsofprivateconstructionindustries
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andhelpsinrevivingthem.Thegovernmentalsoincreasesitsexpenditureonsuch
reliefmeasuresasunemploymentinsurance,andothersocialsecuritymeasuresin
ordertostimulatethedemandforconsumergoodsindustries.Borrowingbythe
governmenttofinancebudgetdeficitsutilizesidlemoneylyingwiththebanksand
financialinstitutionsforinvestmentpurposes.
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Section–C
8)whataretheattributesusedtomeasurenationalincome?Explain
thedifficultiestomeasurenationalincome
NationalIncome:
Nationalincomeisthetotalnetvalueofallgoodsandservicesproduced
withinanationoverasspecifiedperiodoftime.Itrepresentssumofwages,
profits,rents,interestsandpension,paymentsofcitizensofanation.

Theattributesusedtomeasurenationalincomeare:
a)Outputmethod:Inthismethod,thevalueofallgoodsandservicesproducedin
differentindustriesduringtheyearaddedup.Thisisalsoknownasthevalue
addedmethodtoGDPorGDPatfactorcostbyindustryoforigin.Thefollowing
itemsareincludedinIndiainthis:agricultureandalliedservices;mining;
manufacturing,construction,communicationandtradeandotherservices.

b)Incomemethod:ThepeopleofacountrywhoproduceGDPduringayearreceive
incomesfromtheirwork.ThusGDPbyincomemethodisthesumofallfactor
incomes;WagesandSalaries+Rent+Interest+Profit.

c)Expendituremethod:Thismethodfocusesongoodsandservicesproduced
withinthecountryduringoneyear.GDPbyexpendituremethodincludes:(1)
consumerexpenditureonservicesanddurableandnon-durablegoods(C),
(2)investmentinfixedcapitalsuchasresidentialandnon-residentialbuilding,
machinery,andinventories(I)
(3)governmentexpenditureonfinalgoodsandservices(G)
(4)exportofgoodsandservicesproducedbythepeopleofcountry(X),
(5)lessimports(M).Thatpartofconsumption,investmentandgovernment
expenditurewhichisspentonimportsissubtractedfromGDP.Similarly,any
importedcomponent,suchasrawmaterial,whichisusedinthemanufactureof
exportgoodsisalsoexcluded.
ThusGDPbyexpendituremethodatmarketprices=C+1+G+(X-M),where(X-m)isnet
exportwhichcanbepositiveornegative.

Difficultiesinvolvedinmeasurementofnationalincome:
1.DifficultyindefiningtheNation:
Nationalincomeofacountrydoesnotmeanonlyincomeearnedwithina
country.Italsoincludestheincomeearnedfromabroad.
2.Lackofstatisticaldata:
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andvolumeofgoodsandservicesproducedarenotavailableinbackward
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countries.
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2.Absenceofproperrecords:
Manypeopleduetoilliteracy,ignoranceandindifferentattitudesdonothave
thehabitofkeepingproperaccountingdataonproduction,incomeand
expenditures.

3.Existenceofnonmonetarytransactions:
Thenationalincomemustbecalculatedinmonetaryterms.Therearecertain
nonmonetarytransactionswhicharenotincludedinthevalueofaproduct
fore,g,unpaidpersonalserviceofHousewife.Inourcountryallthegoods
andservicesproducedarenotexchangedformoney,partofgoods
andservicesmaybebarteredorconsumedathomebyproducers
themselves.Theexclusionofsuchvalueofgoodswouldgiveusawrong
pictureofthenationalincome.

4.Absenceofoccupationalspecialization:
Manypeopleareengagedinmorethanoneoccupationforearningtheir
livelihood.Manypeopleworkasparttimeworkersandsuchtheydonotgive
completeinformationaboutsourcesoftheirincome.
Fore.g.anindividualmaybeworkingasaclerkinagovernmentofficebuthe
maybegettingsomeadditionalincomefromhisownfarmandsmallgrocery
shop.Itbecomesdifficulttocollectinformationabouttheirincomeunder
suchcircumstances.

5.Dangerofdoublecounting:
WhilecalculatingNationalincomewehavetotakeintoaccountthevalueof
finalgoodsandservicesbutmanytimesthevalueofintermediategoodsis
includedinthenationalincome.Fore.g.thevalueofoiloroilseedstaken
intoaccountandnotthevalueofboth.

6.Existenceofillegalearnings:
Thereishugevolumeofincomesearnedthroughillegalactivitieslike
gambling,smuggling,blackmarketing,adulterationetc..buttheseitems
cannotbeincludedincalculationofnationalincome.

7.Treatmentofprofitsfromforeignfirms:
Profitfromforeignfirmsistreatedasincomeofparentcountryorincomeof
Hostcountry.

8.Imperfectinstrumenttomeasurenationalincome:
Valueofgoodsandservicesmeasuredintermsofmoney.Butthevaluesof
moneyitselfchangeduetoinflationordeflation.
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9.otherincomes:
Incomesearnedthroughlottery,dowry,pensions,unemploymentrelief,etc
shouldbeexcludedfromthecalculationofnationalincomebecausetheabove
itemsaregratis.

10.Goodskeptforselfconsumption:
Thevaluesofthesegoodsaretobeincludedinthecalculationofnational income.

11.Existenceofnonmarkettransactions:
Manypeoplestitchtheirownclothes,growvegetablesintheirowngardens
thevalueofsuchactivitiesdoesnotenterthemarkettransactionsand
hencearenotincludedinthenationalincomeestimates.

12.DIfferentmethods:
Existenceofdifferentmethodstocalculatedepreciationcharges

13.Coverageofcommoditiesandservices:
Valueofallunpaidworkonaccountoflove,affection,mercy,kindness
friendshipetcshouldbeexcludedinthecalculationofnationalincome.

9)Definemultiplier.Bringoutthesignificanceandlimitationsof
multiplier.(Repeated2017)

10.definemoney.Explainthestaticanddynamicroleofmoneyina
economy.
RoleofMoney:
A.Staticroleofmoney:
o Byservingasamediumofexchange:
o Byactingasaunitofaccount:
o Moneyactsasastandardofdeferredpayments:
o Byactingasastoreofvalue
o Moneyactingasatransferofvaluefromoneplacetoanother.

B.Dynamicroleofmoney:
1.Toconsumer:Moneyenablesaconsumertomakearationaldistribution
ofhismoneyonvariousCommoditiesofhischoice.Withmoneyinhands,he
canpurchaseanycommodityandservicehelikes,inwhateverquantitieshe
needs,andatanytimeherequires;notonlythis,moneyact’sasan
equalizerofmarginalutilitiesfortheconsumer.Themainaim isto
achievemaximum satisfactionwithhislimitedincomeondifferentgoods
whichhewantstopurchase.
2.ToProducer:Producerwillkeephisaccountofvaluesofinputsand File
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outputsinmoney.Producereasilycalculatesnotonlyhiscostsof
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production
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andreceiptsbutalsoprofitwiththehelpofmoney.
Further,moneyhelpsinthegeneralflowofgoodsandservicesfrom
agricultural,industrialandterritorysectorsoftheeconomybecauseallthese
activitiesareperformedintermsofmoney.
3.InSpecialisationandDivisionofLabour:Moneyhelpsthecapitalisttopay
wagestoalargenumberofworkersengagedinspecializedjobsonthebasis
ofdivisionoflabour.Eachworkerispaidmoneywagesinaccordancewith
thenatureofworkdonebyhim.Thusmoneyfacilitatesspecializationand
divisionoflabourinmodernproduction.
4.Asthebasisofcredit:Allmonetarytransactionsconsistofcheques,
drafts,etc.thesearecreditinstrumentswhicharenotmoney;itisthebank
depositsthataremoney.Creditcreation,inturn,playsamajorrolein
transferringfundsfromdepositorstoinvestors.Creditexpandsinvestment on
thebasisofpublicsavinglyinginbankdepositsandhelpsinmaintaining
circularflowofincomewithintheeconomy.
5.Asameansofcapitalformation:Bytransformingsavingsintoinvestment,
moneyactsasameanstocapitalformation,savingsinbankwillbelendout
forpurchasesandtherebybankmakescapitalmobileandleadstocapital
formationandeconomicgrowth.
6.Inthedistributionandcalculationofincome:Therewardstothevarious
factorsofproductioninmodernmoneyarepaidinmoney.Aworkergetshis
wages,interest,andlandlordrentandentrepreneurprofit.Theseareallpaid
inmoney;allfactorsofproductionpaymentwillbedoneinmoney.
7.Innationalandinternationaltrade:Tofacilitatetrade,moneyhashelpedin
establishingmoneyandcapitalmarkets;thesearebanks,financial
institutions,stockexchanges,internationalfinancialinstitutions,etc.which
operateonthebasisofthemoneyeconomyandtheyhelpinbothnational
andinternationaltrade,furthertraderelationsamongdifferentcountrieslead
tointernationalcooperation.Asaresult,thedevelopedcountrieshavebeen
helpinggrowthofunderdevelopedcountriesbygivingthoseloansand
technicalassistance.
8.Insolvingthecentralproblemofaneconomy:Moneyhelpsinsolving
centralproblemsofaneconomy.Whattoproduce,forwhomtoproduce,
howtoproduce,andinwhatquantitiesinordertofacilitateflowofgoods
andservicesamongconsumers,producersandgovernment.
9.TotheGovernment:Moneyfacilitatesthebuyingandcollectionoftaxes,
fines,feesandpricesofservicesrenderedbythegovernmenttopeople;
moneyhelpsmoderngovernmentwhichaimsatimprovingthestandard
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unemploymentandachievingeconomicgrowthwithstability.
10.TotheSociety:Moneyconfersmanysocialadvantages.Itisonthebasis
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simplifiesconsumption,production,exchangeanddistribution,moneyisat
thebackofsocialprestigeandpoliticalpower.
11.Moneyfacilitatestrade:Byservingasmediumofexchangerapid
exchangeofgoodsispossible.Inamoderneconomybecauseofmoneyby
pricemechanism
12.Asanindexofeconomicgrowth:Moneyisalsoanindexofeconomic
growth.Thevariousindicatorsofgrowtharenationalincome,percapita
incomeandeconomicwelfare.Thesearecalculatedandmeasuredinterms
ofmoney.Changesonthevalueofmoneyorpricesalsoreflectthegrowth
ofaneconomy.
13.Moneyeliminatesthedrawbacksofthebartersystem:Incaseofbarter
systemdoublecoincidenceofwantsbetweentwoindividualsisnolonger
necessaryinmoney.Thevaluenowcanbemeasuredeasilyandquickly,
thesearenodifficultyintheexchangeofindivisiblegoods.
14.Moneytransferssavingsintoinvestments:Inmoderneconomy
savingsandinvestmentsaredonebytwodifferentsetsofpeople
(householdandfirms),thesavingsofthecommonpeoplecanbegot
transformedintoinvestmentswiththehelpofmoneybyfinancial
institutions.Ex:Banks
15.ImportanceinDistribution:Therewardstothevariousfactorsof
productionaredistributedintermsofmoney.Rent,interest,wagesand
profitsaredeterminedandpaidtofactorsofproduction.
16.Moneyhasmadefuturetransactionspossible:forfuturetransactions
pricesaremarkedinpresent,butpaymentsaremadeinthefuture,thisis
doneforallthecommoditiesbecausemoneyisthemoststableinvalue.
17.Moneyestablishesalinkbetweenthepresentandfuture:Savingsinthe
formofmoneyhelpthesavertomeethisrequirementinfutureintheform
ofpurchasingrequiredgoodsandservices.AccordingtoKeynes“The
importanceofmoneyessentiallyflowsfromitsbeingalinkbetweenthe
presentandfuture”.
18.MoneymakesefficientAccounting&Budgetingpossible:Moneyhas
enabledanindividualtomakearationalchoicebetweenwork&leisure,
spendingandsaving,investingandholdingofaninvestment;withoutmoney
efficientallocationofmoneyorbudgetbecomeimpossible.
19.Moneyhelpstoraiselivingstandard:Moneyhelpsthesocietytoraise
itslivingstandardbyincreasingoverallproductionandthroughequitable
distributionofwealth.
20.Promotionofnationalunity:Moneyencouragestradeandcommerce,
peopleresidingindifferentregionswillmeeteachotherforcommercial
purposes,inturnbringsnationalunity.

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 11)whatiseconomicgrowth?commentontheconflictbetweengrowth andstability
Economicgrowthispositivechangeinthelevelofproductionofgoodsand
servicesbyacountryoveracertainperiodoftime.Economicgrowthis
ussualybroughtaboutbytechnologicalinnovation and positiveexternal forces.
EconomicStability

⮚ Fiscalstabilisers:Built-inautomaticfiscalstabilisers,which
includeprogressivetaxesandescalatingwelfarepayments,
provideashockabsorbertostabiliseaneconomyfollowingan
economicshock.Thecombinedeffectoftheseistocreatefiscal
dragduringperiodsofunusuallystronggrowth,andfiscalboost
duringperiodsofveryweakgrowthornegativegrowth.Negative
orpositivedemandsideshockscanbestabilisedmorequickly
whenautomaticstabilisersarebuilt-intothetax-benefitsystem.
⮚ Floatingexchangerates:Floatingexchangeratesarealso
seenasanautomaticstabiliser.Intheeventofeitheranegative
demandorsupplysideshockaffectinganeconomy,the
exchangeratewillfallascurrencytraderssellthecurrency,
leadingtoafallinexportpricesandanautomaticincreasein
competitiveness.Assumingforeigndemandispriceelastic,
exportrevenuewillrise,and,viaanupwardmultipliereffect,
aggregatedemandwillbounceback.
⮚ Flexiblelabourmarkets:Thethirdautomaticstabiliseris
flexiblelabourmarkets.Intheeventsofademandsideshock,
likethecreditcrunch,aggregatedemandwillfallandfirmswill
experienceafallindemandfortheirproducts.Ifthelabour
marketisinflexible,full-timeworkersmaybemaderedundant,
andtheirspendingwillfall.Assumingadownwardmultiplier
effect,nationalincomewillfallfurther,andtheeconomymay
plungeintoarecession.However,withamoreflexiblelabour
market,anumberofflexibleresponsescanoccur,whichstabilise
theeconomy.Forexample,insteadofmakingworkersredundant,
paycanbereducedsothatunemploymentisavoided.Inaddition, full-
timeworkerscangopart-time,againavoidingfull-blown
unemployment.Finally,amoreflexibleandmobileworkforcecan
movequicklyfromareasorindustrieswithlowdemandtoareas
orindustrieswithhigherdemand.
⮚ Monetarypolicy:Inadditiontotheseautomaticstabilisers, short-
termstabilitycanbemaintainedbyalteringmonetary
conditions,suchasraisingorloweringinterestrates,orby
expandingorcontractingthemoneysupply.Mostnational
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ongoingmonthlybasis.
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www.Bustudymate.in EconomicGrowth

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⮚ Policiestopromotesustainablegrowth:Sustainableeconomic
growthoccursbecauseofincreasesinaggregatedemandand
supply.However,long-termsustainablegrowthultimately
dependsonsupply-sideimprovementsbecausebalanceof
paymentsandinflationaryproblemsarelesslikelywhenthe
productivityoffactorsimproves.Policiestopromotegrowth include:

⮚ Technologypolicy:Technologypolicyreferstopolicies
wheregovernmentprovidesincentivesforprivatefirmsto
investintonewtechnology.Theseincentivescouldbeinthe
formofgrants,cheaploans,ortaxrelief.

⮚ Humancapitaldevelopment:Investmentinhumancapitalby
allocatingmoreresourcestoeducationandtrainingiswidely
regardedatcriticaltothesuccessofdevelopinganddeveloped
economies.Humancapitaldevelopmentprovideskeyskillsand
knowledgetoenableincreasesinproductivityandefficiency.

⮚ Reducingred-tapeandde-regulation:Akeydriverofgrowth
forbothdevelopedanddevelopingcountriesisFDI,andthiscan
beencouragedbyreducingredtapeandunnecessaryregulation,
andopeningupmarketstooverseasinvestors.

⮚ Providingincentives:Nationalgovernmentscanprovide
incentivesforindividualstostarttheirownbusinessand
forsmallbusinessestoexpand.

⮚ Taxreform:Redesigningthetaxandbenefitsystemto
increasethelabouractivityrateandencourageworkand
discourageidlenessisclearlyanimportantoptionforcountries
wishingtoimprovetheirsupply-sideperformance.

⮚ Increasingcompetitivenessandcontestability:Another
importantstimulustosupply-sidegrowthistoincreasethe
degreeofcompetitivenessinthemicro-economyby
promotingcontestability,reducingbarrierstoentry,andby
deregulatingmarketstoencouragenewentrants.

⮚ Newmarkets:Sustainabilitycanalsobeachievedby
encouragingtheformationofnewmarketswhichexploitnew
technologyornewtradingmethods.Thenewlyemerging
marketsforwasteandcarboncredits,andthedevelopmentof
carbonoffsettingschemes,arerecentexamplesofhownew
marketscanemerge,withorwithoutgovernmentsupport.
⮚ Infrastructure:Long-termdevelopmentofinfrastructure
 projectsisalsocentraltothepromotionoflongtermsgrowth
anddevelopmentinaglobalisedenvironment.Better
infrastructureenablesoutputtobetransportedatlowercost,as
wellasgeneratingjobsandotherpositiveexternalities. File
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12)ExplainthevarioustoolsoffiscalPolicy?DiscusstheCo
ordinationofmonetaryandfiscalpolicy?
Themaintoolsoffiscalpolicyofanygovernmentaretwo.
1.Publicrevenue:Itreferstotheincomeorreceiptsandincomingof
publicexpenditures.Taxesarethemainsourceofrevenuetoa
government.Ataxmaybedefinedasacompulsorypaymentmadebya
citizentothegovernmentwithoutexpectinganydirectreturnbenefit.
Therearetwotypesoftaxes.Theyaredirecttaxeslikecustomsduties,
exciseduties,salestaxnowcalledasVATetc.

2.PublicExpenditure:Itreferstotheexpenditureincurredbythepublicauthorities
likecentral,Stateandlocalgovernment.Itisoftwokinds,developmentorplan
expenditureandnondevelopmentornonplanexpenditure.Planexpenditure
includeincomegeneratingprojectslikedevelopmentofbasicindustries,
generationofelectricity,developmentoftransportandcommunication,
constructionofdamsetc.Nonplanexpenditureincludesdefenseexpenditure,
subsidies,interestpaymentsanddebtservicingchargesetc.

3.Publicdebt:Publicdebtisalsocalledaspubicborrowingspolicy.Whenpublic
expenditureexceedspublicrevenueagapiscreated.Inordertofillthegap,a
governmentResortorBorrowings.Alloanstakenbythegovernmentconstitutes
publicdebt.Itreferstotheborrowingsmadebythegovernmenttomeetever-rising
expenditure.

Theco-ordinationofmonetaryandfiscalpolicy

IndianGDPgrowthcontinuedtoshowinQ2-11,rising7.7%Y/Y,largelyasaresultf
weakerpersonaladgovernmentspending.Onaseasonallyadjustedbasis,q/qreal
GDPwasonly5.5%anannualizedrate,ownfrom8.4%inQ1-1.Withtheongoing
monetarypolicytighteningandexternaldevelopments,businessandconsumers
haveshownmorerestraints,sappingthemomentumfromoftheIndianeconomy.
Whilegovernmentinfrastructurespendingremainsathighlevel,thepaceofgrowth
hasstartedtolevel,offaftertherampupinitiatedearlylastyear.Despitefurther
declineinbusinessconfidence,investmentspendingpickupslightlyinQ2-11,but
notsufficientlytomakeasignificantcontributiontogrowth.Asharpslowdownin
miningpusheddownindustrialactivityinthesecondquarterdespiteamoderate
improvementinmanufacturingproduction,driveninlargepartsbyrisingexports
despitetheappreciatingrupee.

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FiscalPolicy:Underpressurefromvariousscandals,thegovernmentresenteda
budgetforFY2011/2012thatisweakonreformsandconsolidation.Thecentral
governmentdeficitisexpectedtoreach4.6%ofGDPinFY2011/2012from5.1%in
FY2010/2011,butthistargetnowlooksincreasinglydifficulttoachieveas
revenueshaveunderperformedwiththeeconomicslowdown.Additionally,higher
foodpricesmakeitpoliticalydifficulttoreducefoodsubsidiesatthisjuncture.
Nonetheless,economicgrowthremainssufficientlystrongtokeeppublicdebtto
GDPonadecliningtrend,expectedtoreach65%nextyear.

Monetarypolicy:Withinflationarypressurespickingupagainearlyin2011,theRBI
returnedtoatighteningstance,raisingthereporateby325basispointsinthelast
year.TheRBI’smainfocusisclearlyoninflationratherthangrowth.Thetightening
waspromptednotonlybyresilientinflationpressures,
WhichhasbeensteadilyincreasingsinceJanuary,butalsostrongdemandfor
credit,whichacceleratedtoover20%Y/YsinceJanuary.Whileinflationwaslargely
drivenbyfoodandfuel,bothofwhichtheRBIhaslittleimpactonthrough
monetarypolicy,theriseinothercategoriesaswellascreditgrowthisofgreater
concernthanexternaldevelopments,asIndiahaslimitedexposuretotheglobal
monetarysystem.
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