Government in the Macroeconomy

There are three kinds of policy that the government has used to influence the macroeconomy: Fiscal policy Monetary policy Growth or supply-side policies

Fiscal policy refers to government policies concerning taxes and spending. Monetary policy consists of tools used by the Federal Reserve to control the quantity of money in the economy. Growth policies are government policies that focus on stimulating aggregate supply instead of aggregate demand.

The Three Market Arenas Households, firms, the government, and the rest of the world all interact in three different market arenas: Goods-and-services market Labor market Money (financial) market

Households and the government purchase goods and services (demand) from firms in the goods-and services market, and firms supply to the goods and services market. In the labor market, firms and government purchase (demand) labor from households (supply). The total supply of labor in the economy depends on the sum of decisions made by households.

Aggregate Supply and Aggregate Demand Aggregate demand is the total demand for goods and services in an economy. Aggregate supply is the total supply of goods and services in an economy. Aggregate supply and demand curves are more complex than simple market supply and demand curves.

India’s Geography India has one-third the land mass of the United States; and nearly four times its population. India therefore must develop strategies for sustainable growth and livelihood which suits its requirements, while continuing to integrate with the world economy and moving towards a knowledge-based society Economic efficiency in the use of scarce resources, growth and social cohesion promoting institutions, socio-political norms are therefore imperatives.

India’s Share in World GDP

India constitutes nearly 17 percent of the world’s population, but even in PPP terms its GDP share is only 5 percent.

In all “good” things (eg, agricultural production, GDP, patents, tourists, FDI) India’s share is at least one-sixth of the world’s total.

Major Challenges Ensuring that good economics is good politics (this will require a shift from ruling to governing mindset, and administrative and civil service reforms). Environmental challenges.

Strengths sustained growth at 6. current a/c deficit low healthy forex reserves low external debt low inflation regime political consensus on reforms deepening financial sector knowledge base advantage.Energy and Food Security. skills and the general business climate. productivity and employment. coalition compulsions social indicators below world average FDI in India FDI is investment made by a foreign individual or company in productive capacity of another country. India is considered a stable country for investing in by corporate overseas. monsoons slowing of reforms. Accelerating physical and social infrastructure investments. debt gdp ratio high fiscal situation of states worse inadequate infrastructure.4 for over a decade (but recent slowdown) strong export potential. huge funding need unsatisfactory investment climate rising gap between rich and poor states dependence on oil imports. It is the movement of capital across national frontiers in a manner that grants the investor control over the acquired asset. . Coping with demographic challenges. Managing Urbanization. India has displaced US as the second-most favored destination for (FDI) in the world after China according to an AT Kearney's FDI FDI is a tool for jump-starting economic growth through its bolstering of domestic capital. demographic surge Weaknesses fiscal deficit high. Developing human capital for sustainable livelihoods through application of knowledge economy . FDI has an impact on Country's trade balance Increasing labour standards and skills Transfer of new technology and innovative ideas Improving infrastructure.

5 percent per annum. Indian Financial System Functions Saving Function Liquidity Function Payment Function Risk Function Policy Function Financial Markets Defined as the market in which financial assets are created or transferred. Money Market Main Function To channelize savings into short term productive investments like working capital .S. $11. Classification Money market (Short term instrument) Capital markets (Long term instrument) The most important distinction between the two: The difference in the period of maturity.US INVESTMENT IN INDIA U.8 million as on August 2004 recording an increase at a compound rate of 57.3 million in 1991 to US $4132. These assets represent a claim to the payment of a sum of money sometime in the future and/or periodic payment in the form of interest or dividend. is one of the largest foreign direct investors in India. The stock of actual FDI Inflow increased from U. Instruments in Money Market Call money market Treasury bills market . The FDI inflows from the US constitute about 11 percent of the total actual FDI inflows into India.S.

Promissory Note Referred as note payable in accounting .Markets for commercial paper Certificate of deposits Bills of Exchange Money market mutual funds Promissory Note Call Money Market Part of the national money market Day-to day surplus funds mainly of banks are traded Short term in nature Maturity of these loans vary from 1 to 15 days Lent for 1 day: Call money Lent for more than 1 day but less than 15 days: Notice money Convenient interest rate Highly liquid loan repayable on demand Commercial Papers Unsecured Promissory note. Flexible Maturity Low interest rates with compared to banks. Issued by well known companies with strong and high credit rating. Sold directly by the issuers to investors or through agents like merchant banks and security houses. Imparts a degree of financial stability to the system.

RBI and public financial institution can set it either directly or through its existing subsidiaries. in the sale of a business. Greater flexibility to investors in the deployment of surplus funds. Purpose for these resources Expansion Capacity Expansion Investments .It is a contract detailing the terms of a promise by one party (the maker) to pay a sum of money to the other (the payee). Certificates of deposits Defined as short term deposit by way of usance promissory notes. MMMF Open Ended Close Ended Capital Markets Provided resources needed by medium and large scale industries. the purchase price might be a combination of an immediate cash payment and one or more promissory notes for the balance. For example. Transferable in nature Free negotiability and limited flexibility Money market mutual funds Invest primarily in money market instruments of very high quality. Permitted by the RBI to banks Maturity of not less than 3 months and upto 1 year. The obligation may arise from the repayment of a loan or from another form of debt.

Provides opportunities to various class of individuals and entities.Mergers and Acquisitions Deals in long term instruments and sources of funds Main Activity Functioning as an institutional mechanism to channelize funds from those who save to those who needed for productive purpose. Structure of Capital Markets Primary n Secondary mrkt When companies need financial resources for its expansion. The place where such securities are traded by these investors is known as the secondary market. they borrow money from investors through issue of securities. Budget Process and Politics To budget is to fight over money There will always be friction among congressional committees and between those who make tax policy and control spending The budget process is the means by which this conflict is channeled to enable agreement each year .

Sign up to vote on this title
UsefulNot useful