MACRO ECONOMICS

BY
DR. KALYANI BONDRE
MONEY
Universal Acceptability
Medium of Exchange
Means of Payment
Measure of Value
Standard for Deferred Payment
Store of Value or Purchasing Power
DEMAND AND SUPPLY OF MONEY

• Demand for money comes from the

people
• Supply of money (currency + credit)
comes from RBI and commercial banks
• Quantity Theory of Money:
If supply of money increases, all other
things remaining the same, the price level
in the economy increases
INFLATION
A sustained rise in the general price level
in an economy
Too much money chasing too few
commodities
A fall in the Value of Money
CAUSES AND TYPES OF INFLATION

Increase in Money Supply

Increase in Government Spending
Economic Growth
Increase in Population
Deficit Financing
Increase in Private Expenditure
Parallel Economy
TYPES OF INFLATION
Demand Pull inflation
Cost Push Inflation
Mark-up Inflation
Wage Inflation
Food Inflation
Sectoral Inflation
EFFECTS OF INFLATION
On Consumers
On Production
On Distribution of Income and Wealth
On Debtors and Creditors
On Salaried Class (Fixed Income)
On Entrepreneurs
On Investors
DEFLATION
A sustained fall in the general price level
Opposite of inflation
Reduction in Money Supply
Reduction in Business Activity
An increase in the Value of Money
Output of goods and services increases more
rapidly than the flow of money in the economy
CAUSES OF DEFLATION
Over-production

Over-investment

Recession

Reduction in the supply of money

Reduction in Government spending
Reduction in Private spending
MEASURES TO CONTROL
INFLATION AND DEFLATION

Fiscal Policy: Government

Monetary Policy: Central Bank (RBI)
Combination of both the policies and
Deficit Financing
NATIONAL INCOME
Indicators of National Income

GNP: Gross National Product

GDP: Gross Domestic Product
SAVING AND INVESTMENT
Process of Capital Formation
Relationship between Savings and Investment
Relationship of Savings and Investment with
the Interest Rate
Determinants of Investment in addition to
interest rate; psychological factor
PARALLEL ECONOMY
Unaccounted money
Increase in level of inflation
Increase in private spending
Lower amount of tax revenue
Higher land prices
MCQs
1. Value of money decreases when
a. Decrease in money supply
b. There is increase in money supply
c. When there is deflation
d. When there is recession

2. Commercial banks increase money supply when

there is
a. Credit creation
b. Deficit financing
c. Taxation
d. Subsidies
3. When there is recession, there is
a. Fall in the value of money
b. Rise in the value of money
c. Inflation
d. None of the above

4. When there is inflation,

a. Debtors gain, creditors lose
b. Debtors lose, creditors gain
c. Both debtors and creditors lose
d. Both debtors and creditors gain
5. Macroeconomics is a study of
economics that deals with which 4 major
factors:
a. households, firms, government, and
demand-supply
b. households, firms, government and
external sector
c. firms, government, free-market, and
regulations 
d. none of the above