Managerial Economics (Macro)

Post Graduate Diploma in Business Administration Mater in Business Administration
Semester II
Managerial Economics (Macro)
MIT School of Distance Education, Pune
This book is the part of the course, by the MIT School of Distance Education, Pune. This book contains content for the Managerial Economics (Macro) course.
Universal Training Solutions, Pune First Edition 2010
Published by
MITSDE
S. No. 124, Paud Road Kothrud, Pune 411038 Maharashtra, India Tel: 08805010216 Website: www.mitsde.com E-mail: sde@mitsde.com
Index
Content .................................................................................................................................................................. II List of figures .......................................................................................................................................................IV List of tables.......................................................................................................................................................... V Case Study ........................................................................................................................................................... 51 Bibliography ........................................................................................................................................................ 55 Answers to self assessment .................................................................................................................................. 57 Book at a glance
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Content
Chapter I ............................................................................................................................................... 1 Introduction to Macroeconomics ............................................................................................................... 1 Aim ............................................................................................................................................... 1 Objectives ............................................................................................................................................... 1 Learning Outcome ........................................................................................................................................ 1 1.1 Introduction .............................................................................................................................................. 2 1.2 History of Macroeconomics .................................................................................................................... 2 1.3 Goals and Instruments of Macroeconomics ............................................................................................ 4 1.4 Instruments of Macroeconomics ............................................................................................................. 6 Summary ............................................................................................................................................... 7 References ............................................................................................................................................... 7 Recommended Readings ............................................................................................................................... 7 Self Assessment ............................................................................................................................................ 8 Chapter II ............................................................................................................................................. 10 Aggregate Demand Supply and Measurement of Output ..................................................................... 10 Aim ............................................................................................................................................. 10 Objectives ............................................................................................................................................. 10 Learning Outcome ...................................................................................................................................... 10 2.1 Definition of Aggregate Demand and Supply ........................................................................................11 2.1.1 Aggregate Demand and Supply Curve .................................................................................. 12 2.2 GDP (Gross Domestic Product) ............................................................................................................ 12 2.1.1 Entities of GDP ..................................................................................................................... 13 2.3 GDP at Factor Cost and GDP at Market Price ...................................................................................... 14 2.4 Gross National Product (GNP) ............................................................................................................. 14 2.5 Net Domestic Product and Net National Product ................................................................................. 14 2.6 Real and Nominal GDP ......................................................................................................................... 15 2.7 Per Capita Income and Personal Disposable Income ........................................................................... 15 Summary ............................................................................................................................................. 16 References ............................................................................................................................................. 16 Recommended Readings ............................................................................................................................. 16 Self Assessments ......................................................................................................................................... 17 Chapter III ............................................................................................................................................. 19 Consumption Investment & Supply of Money ....................................................................................... 19 Aim ............................................................................................................................................. 19 Objectives ............................................................................................................................................. 19 Learning Outcome ...................................................................................................................................... 19 3.1 Meaning and Definition of Consumption .............................................................................................. 20 3.1.1 Marginal Propensity to Consume (MPC) .............................................................................. 21 3.2 Investment ............................................................................................................................................. 22 3.3 Money Supply ....................................................................................................................................... 24 3.3.1 Exogenous and Endogenous Process of Money Supply ....................................................... 24 3.3.2 High Powered Money and Money Supply ............................................................................ 24 3.3.3 Measures of Money Supply in India ...................................................................................... 25 Summary ............................................................................................................................................. 26 References ............................................................................................................................................. 26 Recommended Readings ............................................................................................................................. 26 Self Assessment .......................................................................................................................................... 27
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Chapter IV ............................................................................................................................................. 29 Business Cycle and Inflation .................................................................................................................... 29 Aim ............................................................................................................................................. 29 Objectives ............................................................................................................................................. 29 Learning Outcome ...................................................................................................................................... 29 4.1 Meaning and Definition of Business Cycle ........................................................................................... 30 4.1.1 Real Example of the Phases of Business Cycle .................................................................... 30 4.1.2 Characteristics of Recession in Business Cycle ................................................................... 31 4.2 Inflation ............................................................................................................................................. 31 4.2.1 Causes of Inflation ................................................................................................................ 31 4.2.2 Measurement of Inflation ...................................................................................................... 33 Summary ............................................................................................................................................. 34 References ............................................................................................................................................. 34 Recommended Readings ............................................................................................................................. 34 Self Assessment .......................................................................................................................................... 35 Chapter V ............................................................................................................................................. 37 Monetary Policy ........................................................................................................................................ 37 Aim ............................................................................................................................................. 37 Objectives ............................................................................................................................................. 37 Learning Outcome ...................................................................................................................................... 37 5.1 Meaning and Definition of Monetary Policy ......................................................................................... 38 5.2 How to Achieve the Goals of Monetary Policy? ................................................................................... 38 5.3 Monetary Measures ............................................................................................................................... 39 Summary ............................................................................................................................................. 41 Reference ............................................................................................................................................. 41 Recommended Readings ............................................................................................................................. 41 Self Assessment ........................................................................................................................................... 42 Chapter VI ............................................................................................................................................. 44 Fiscal Policy ............................................................................................................................................. 44 Aim ............................................................................................................................................. 44 Objectives ............................................................................................................................................. 44 Learning Outcome ...................................................................................................................................... 44 6.1 Meaning and Definition of Fiscal Policy ............................................................................................... 45 6.2 Techniques of Fiscal Policy ................................................................................................................... 45 6.3 Fiscal Policy during Economic Boom ................................................................................................... 46 6.4 Balanced Budget ................................................................................................................................... 46 Summary ............................................................................................................................................. 48 References ............................................................................................................................................. 48 Recommended Readings ............................................................................................................................. 48 Self Assessment ........................................................................................................................................... 49
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List of Figures
Fig. 1.1 Fig. 1.2 Fig. 1.3 Fig. 2.1 Fig. 2.2 Fig. 2.3 Fig. 3.1 Fig. 3.2 Fig. 3.3 Fig. 4.1 Fig. 4.2 Fig. 4.3 Fig. 5.1 Fig. 6.1 GDP growth rate of India from Jan-2006 to June-2010 ........................................................ 4 Percentage of population in age group of 15-59 years .......................................................... 5 Employment (in millions) during 1993-94 to 2004-05 ......................................................... 6 Aggregate demand and supply determine the macroeconomic variables ............................11 Aggregate demand and supply curve ................................................................................. 12 Two parameters for the measurement of GDP ................................................................. 13 Plot of consumption function .............................................................................................. 21 The MPC curve ................................................................................................................... 22 Marginal efficiency of capital ............................................................................................. 23 Phases of business cycle...................................................................................................... 30 Demand pull inflation ......................................................................................................... 32 Cost push inflation curve .................................................................................................... 33 Flowchart for the process of monetary policy..................................................................... 39 Fiscal policy in economic boom ......................................................................................... 46
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List of Tables
Table 1.1 Table 1.2 Table 3.1 Table 3.2 Table 3.3 Table 4.1 Goals and instruments of macroeconomics........................................................................... 4 GDP growth rate of india for the year 2010 .......................................................................... 5 Categories of consumptions ................................................................................................ 20 Consumption data................................................................................................................ 20 Marginal propensity to consume ......................................................................................... 22 Turning point dates of current economy ............................................................................. 30
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Abbreviations
CPI CRR GDP GNP MPC NDP NNP PPI RBI RRR WPI Consumer Price Index Cash Reserve Ratio Gross Domestic Product Gross National Product Marginal Propensity to Consume Net Domestic Product Net National Product Producer Price Index Reserve Bank of India Reverse Repo Rate Wholesale Price Index
NFIA Net Factor Income from Abroad NSSO National Sample Survey Organization
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Chapter I Introduction to Macroeconomics

Aim
The aim of this chapter is to: define the meaning of macroeconomics and list various important concepts in it list goals and instruments of macroeconomics explain the students the central theme of macroeconomics
Objectives
The objectives of this chapter are to: list the major themes of macroeconomics like business cycle and economic growth emphasise on the reasons of inflation and economic growth discuss the utility of scarce resources like labour, capital and land list the various concepts of macroeconomics like fiscal policy and monetary policy explain the employment situation and Gross Domestic Product with the help of real time examples
Learning Outcome
After reading this chapter, the students are expected to understand: the concept and the reason behind macroeconomics the role of GDP in economic growth the use of macroeconomics instruments namely fiscal policy and monetary policy
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1.1 Introduction
As we have already studied that economics is the study of: society utilisation of scarce resources satisfying unlimited wants description of various scopes at individual and national level.
Based on above mentioned study, some questions that crop up are like: do the living standards of people increases or the economic growth? is it easy to find jobs or are there ample jobs available in the market? does the central bank raise the interest rate to keep price rise in check?
Two major themes can be figured out through the survey of macroeconomics: Business Cycle: fluctuation in output, employment and prices is called as Business Cycle. Economic Growth: this includes living standards and long term trends like national income, economic problems and economic fluctuation and so on.
1.2 History of Macroeconomics

The modern microeconomics first began in 1936, when John Maynard Keynes described the concept in his first publication as, "The General Theory of Employment, Interest and Money." The General Theory was written during the Great Depression. According to the book, the level of employment is determined not by the price of labour, but by spending of money. He also argues that it is wrong to assume that competitive market will, in the long run, deliver full employment and equilibrium state of a monetary economy.
The central idea of macroeconomics is based on the following issues: Why do employment and output sometimes fall, and how to reduce unemployment? The expansion and contraction of market is based on business cycles. The last major downturn in the United States occurred in 1999-2001 during the terror attack on the World Trade Centre (WTC). The key concept behind economic recovery is the reduction in unemployment rate. As per the economist Frank Shostak, the unemployment rate was almost 15 million in August 2009. Reduction in unemployment is the real activity of an economy. The main driver of economic growth is the escalation of the pool of real savings. Here real saving means the enhancement and expansion of infrastructure. A developed infrastructure permits the production of final goods and services required to maintain the economic platform and growth of individual and nation. Globalization and rapid technological development gives rise to increased labour mobility and brings new employment opportunities, which, in turn, needs enhanced human resource development. Currently, in many developed countries, growth in employment is great in small and medium-sized enterprises and in self-employment. In many developing countries, informal sector activities are often the leading source of employment opportunities for people with limited access to formal-sector wage employment, particularly for women. The removal of obstacles to the operation of such enterprises and the provision of support for their creation and expansion must be accompanied by protection of the basic rights, health and safety of workers and the progressive improvement of overall working conditions, together with the strengthening of efforts to make some enterprises part of the formal sector.
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What are the factors responsible for inflation, and how can it be kept under control? Inflation is referred to the general rise in prices considering the purchasing power of common man. As per the survey report of 2009-10, in India, the food inflation increased in double digit which affected all other sectors as well. For 2009, Indian inflation stood at 11.49%. Such rate increases the prices of commodity and also affects the purchasing power of common man. As per the survey, the economy is expected to grow at a rate of 9% in the year 2011-12.
Macroeconomics suggests the proper role of monetary and fiscal policies of exchange rate system, and an independent central bank in containing inflation. There are two main causes of inflation: Rise in demand or Demand Pull Inflation Rise in cost of factor production or Cost Push Inflation (Details of above are described in chapter-4.) How can a nation increase its rate of economic growth? Macroeconomics is concerned with economic growth in terms of production potential of an economy. The improvement of quantity and quality of factors of production like land, labour and capital increases the economic growth rate.
Improving the quantity and quality of following scarce resources can lead to high economic growth: Land Increase in land available for agricultural propose will increase the economic growth. Bush land is highly used for the agricultural purpose, so it is no longer a habitat for wildlife. Due to the diminished marginal return, if more labourers are used for converting bush land to agricultural land then the productivity of labour will decrease. To prevent this loss in productivity, the quality of land must be improved. This can be done with better application of technology and improved irrigation facility.
Human resource As per the basic concept, we know that, Increase in population Increase in the number of young people entering into the labour force Increase the supply of labour Increase in economic growth We can say that the mere increase in quantity of labour does not lead to the economic growth but, quality also plays a crucial role. Here quality refers to skill set of labourers. For example, in India, the IT companies train their employees for better output. This results in the economic growth in India.
Capital Capital resources are of two types, Directly productive capital (plant and equipments) Indirectly productive capital (infrastructures like road and railways) The process of acquiring capital is called as investment. The level of investment and the quality of investment directly affects the economic growth of a nation.
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1.3 Goals and Instruments of Macroeconomics

Here, the major goals and instruments of macroeconomic policies are discussed. The main objectives are goals of the government policies, whereas the tools and strategies to achieve these goals are called as instruments. The major instruments are mentioned in the table below: Goals Output: Growth in output Employment: High level of employment Instruments Monetary Policy: changes in interest rate, supply in money and credit Fiscal Policy: changes in government taxation, policies and expenditure
Table 1.1 Goals and instruments of macroeconomics Output The main objective of economic activity is to provide the essential goods and services to people. These goods and services are nothing but the output of a nation. The most comprehensive measure of the total output is Gross Domestic Product (GDP). GDP is the total market value of all product and services produced by a nation or a country in a given year. The Gross Domestic Product (GDP) in India expanded at an annual rate of 8.80% in the last reported quarter. From 2004 to 2010, India's average quarterly GDP growth was 8.37%, reaching an historical high of 10.10% in September, 2006 and a record low of 5.50 percent in December, 2004, as shown in Fig. 1.1 and Table 1.2. India's diverse economy encompasses traditional village farming, modern agriculture, handicrafts, a wide range of modern industries, and a multitude of services. Services are the major source of economic growth, accounting for more than half of India's output with less than one third of its labour force.
11 10
50% of date points
INDIA GDP GROWTH RATE

Annual GDP Growth Adjusted by inflation
8 7 6
100% of date points
8.80% as per second quarter of the year 2010
11 10 9 8 7 6
Min; 5.8 Max; 10.1
Mean; 8.42
5 Jan/2006
Jan/2007
Jan/2008
Jan/2009
Jan/2010
Fig. 1.1 GDP growth rate of India from Jan-2006 to June-2010 Source: TradingEconomics.com: Indias Central Statistical Organization
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Year Mar 2010 8.60 2009 5.80 2008 8.50
Jun 8.80 6.00 7.80
Sep 8.60 7.50
Dec 6.50 6.10
Table 1.2 GDP Growth rate of india for the year 2010 High Employment People want high-paying job within short time period, with assured job security and good benefits. In macroeconomics terms, these are the main goals of high employment. Currently, India is passing through the ongoing demographic changes which cause increase in the size of labour force in the country. As per Govt. of India, Ministry of Labour & Employment, the working age group (15-59 years) is likely to increase from 58% in 2001 to 64% by 2021
Percentage of Population in Age group of 15 - 59 Years % population in 15-59 years age group 66 64 62 60 58 56 54 2001 2008 2011 Year
Fig. 1.2 Percentage of population in age group of 15-59 years As per the survey conducted by NSSO (National Sample Survey Organization), employment figure in the Indian market for the year 2004-05 was 385 million. The data for year 2009-10 is still in progress by NSSO. The employment during year 1993-94 to 2004-05 is as shown below:
63.9 62.7 60.4 57.7
64.2
2016
2021
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500 Total employment (in millions) 450 400 350 300 250 200 150 100 50 0 1983 1993-94 Years
Fig. 1.3 Employment (in millions) during 1993-94 to 2004-05 Source: MoL&E, 2008 and Planning Commission, 2008
385 314 239 338
1999-2000
2004-2005
1.4 Instruments of Macroeconomics

Fiscal policy Fiscal policy is made by the government for controlling the government expenditure, supply of money and taxes. Government expenditure has two distinct forms: Government spending on various goods and services like purchasing of tanks, construction of roads and railways, salaries for judges and so on. Government transfers the payments to the targeted group such as elderly or unemployed people to boost them up.
Taxation is another part of fiscal policy that affects the overall economy in two ways: Tax affects the prices of goods and factors of production, thereby affecting the incentive and behaviour. Tax tends to affect the amount that people spend on goods and services as well as amount of private saving. Private consumption and savings have important effects on investment and output in short run and long run.
Monetary Policy Monetary policy is one of the tools that a national government uses to manage its economy. Using its monetary authority to control the supply and availability of money, a government attempts to manage the overall level of economic activity. Monetary policy is usually administered by the government appointed "Central Bank" and the Federal Reserve Bank in the United States. The money supply has a large impact on macroeconomic activities. By changing money supply, the Federal Reserve Bank can influence many financial and economic variables such as interest rates, stock price, exchange rates, etc. If the money supply is restricted, then the interest rate will be high and it will cause decline in GDP and investment as well.
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Summary
The first part of the chapter covered the general introduction of macroeconomics and described the two major themes of macroeconomics called the Business Cycle and Economic Growth. Fluctuation on output, employment and prices is called Business Cycle. Living standards and long term trends like national income, economic problems and fluctuations, etc. come under economic growth. Next part described the central idea of macroeconomics, which include low unemployment, high GDP and low inflation rate. There are two main causes of inflation, Rise in demand or Demand Pull Inflation Rise in cost of factor production or Cost Push Inflation Then it covered the goals and instruments of macroeconomics. Some of the major goals of macroeconomics are output and employment. Similarly, the instruments which are used in macroeconomics are Fiscal policy and Monetary Policy. Fiscal policy is made by government for controlling the government expenditure, supply of money and taxes. Monetary policy is used by government to manage its economy. Using its monetary authority, a nation controls the supply and availability of money and attempts to manage the overall level of economic activity.
References
Annual Report to the people on employment, Government of India, Ministry of Labor and Employment. (1st July 2010). http://labour.nic.in/Report_to_People.pdf. Accessed 10 November 2010. Frank Shostak, (September 21st 2010). Unemployment is the key to US Economy. http://mises.org/daily/4724. Accessed 10 November 2010. Introduction to Macroeconomics, http://www.scribd.com/doc/12374776/Overview-of-Macroeconomics. Accessed 10 November 2010. United Nations Department of Economic and Social Affairs, World Summit for Social Development Copenhagen 1995 Expansion of Productive Employment and Reduction of Unemployment. http://www.un.org/esa/socdev/ wssd/pgme_action_ch3.html. Accessed 10 November 2010.
Recommended Readings
Dr. D.M Mithani, (2008). Institute of Business Study and Research, Himalaya Publishing House Pvt. Ltd. P578. Paul A. Samuelson, (2002). Economics, Massachusetts Institute of Technology, Tata McGraw-Hill Publishing Company. P414-421. Suraj B. Gupta, (2009). Monetary Economics, Money and Payment System, S. Chand & Company, New Delhi. P15.
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Self Assessment
1. Which of the following is not included in the study of economics? a. Society b. Utilisation of scarce resources c. Satisfying unlimited wants d. Capital 2. Which of the following statement is true? a. Macro economy activities involves low unemployment. b. Macro economy activities involves low capital. c. Macro economy activities involves low labour. d. Macro economy activities involves low economic growth . 3. As per the "General Theory" written by John Maynard Keynes, a. employment is determined not by the price of labour but by spending of money. b. employment is determined the price of labour. c. employment is determined by spending of money. d. employment is determined not by the price and by spending of money. 4. What is the meaning of real saving? a. Saving by individual b. Saving of company c. Enhancement and expansion of infrastructure d. Saving of Government 5. What is the meaning of inflation? a. Inflation is referred to the general rise in prices. b. Inflation is referred to the general rise in prices considering the of purchasing power of common people. c. Inflation is referred to the general fall in prices. d. Inflation is referred to the general fall in cost of production. 6. How many types of capital resources are there? a. One b. Two c. Three d. Four 7. Which of the following is not the instrument or goal of Macroeconomics? a. Fiscal Policy b. Monetary Policy c. Output d. Government Policy
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8. The most comprehensive measure of the total output is --------------. a. GDP b. GNP c. per capita income d. law of diminishing marginal return 9. People want high-paying job within short period of time. This concept is called as a. Low employment b. High employment c. High profile job d. Private job 10. Monetary policy is usually administered by the --------------------. a. government b. government appointed banks c. state banks d. private banks
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Chapter II Aggregate Demand Supply and Measurement of Output

Aim
The aim of this chapter is to: define the meaning of aggregate demand and aggregate supply of macroeconomics formulate various measurements of macroeconomics which are the basics for economic activities in a nation.
Objectives
The objectives of this chapter are to: explain the students the meaning of aggregate demand and supply define aggregate demand and aggregate supply curve with the help of real time example list various entities of GDP and give the brief elaboration of each entity formulate the equation of GDP in market price and in cost factor list various measurements of macroeconomics by considering individual and nation formulate the equation of per capita income and personal disposable income
Learning Outcome
After reading this chapter, the students are expected to understand: the meaning of aggregate demand and supply and reasons behind its fluctuation the rotation of money and how it will help in economy entities and equation of GDP in market price and in cost factor uses of various measurements of macroeconomics equation of per capita income and personal disposable income
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2.1 Definition of Aggregate Demand and Supply

To explain the major trends of output and prices, economists developed the concept of aggregate demand supply analysis. This Aggregate demand and supply is one of the important tools in macroeconomics which helps in measuring various events of economics. Basically, firms get demand from four main sources like: households (personal consumption) firms (investment) government agencies (government purchases) foreign market (net export).
Aggregate Demand is the relationship between total quantity of goods and services demanded from all four sources and the price level of respective goods and services. Aggregate supply refers to the total quantity of goods and services that a particular nation is willing to produce and sell in given period. Aggregate supply also depends upon the price level and cost of production, output generated and the optimum utilization of scarce resources (land, labour and capital). The potential output or the output generated by any firm or nation is determined by the availability of productive input like labour and capital. Using both, the combination of demand and supply, we achieve the resulting output which determines the employment, prices and GDP of a nation.
Monetary policy - Investment & Government Agencies Fiscal Policy other forces Personal consuption, Foreign market
Output (real GDP)
Aggregate Demand
Employment and Unemployment
Interaction of aggregate supply and demand

Price level and costs
Aggregate Supply
Prices and inflation
Potential output
Capital labor, Technology
Foreign trade
Fig. 2.1 Aggregate demand and supply determine the macroeconomic variables (Source: Economics, Paul A. Samuelson & William D. Nordhaus)
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2.1.1 Aggregate Demand and Supply Curve Fig. 2.2 shows the aggregate supply and demand schedule for the output of an entire economy. On the horizontal, or quantity, axis is the total output (Real GDP) of the economy. On the vertical axis is the overall price level (measure by consumer price index). We use the symbol Q for Real GDP and P for Price level. The downward slope of curve is the Aggregate Demand Schedule named AD. It represents what everyone consumers, businesses, foreigners and government would buy at different aggregate price level. From the curve, we can see that, when the price level is at 150, total spending will be $3000 billion per year. If the price level rises to 200, total spending will fall to $2300 billion. The upward sloping curve is the Aggregate Supply Schedule, or AS curve. This curve represents the quantity of goods and services that businesses are willing to produce and sell at each price level. According to the curve, business will want to sell $3000 billion at a price level of 150. They will want to sell a higher quantity, $3300 billion, if prices rise to 200. As the level of total output demanded rises, business will want to sell more goods and services at a higher price level. The Macroeconomic Equilibrium curve is the point where the combination of overall price and quantity at which all the buyers and sellers are satisfied with their purchase, sell and prices. If the price level is more than equilibrium, that means if P = 200, then business will try to sell more than what the purchasers are willing to buy. Once the equilibrium is reached, neither buyer nor the suppliers will change their quantity of demand or supply.
P Price index for all commodities 250 200 150 100 50 0 0 B E
AS
AD 1,000 2,000 3,000 4,000 Real GDP (billions) 5,000 Q
Fig. 2.2 Aggregate demand and supply curve (Source: Economics, Paul A. Samuelson & William D. Nordhaus)
2.2 GDP (Gross Domestic Product)

We have already described overview of GDP in last chapter. It is the most comprehensive measure of nation's total output of goods and services. It is the sum total of Personal Consumption (C), Investment (I), Government Purchases (G) and Net Export (Xn). Thus the equation is: GDP = Consumption (C) + Investment (I) + Government Purchases (G) + Net Export (Xn) Or GDP = C + I + G + Xn
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GDP is used to measure the overall performance of an economy. For example, during the great depression of 1929, which lasted 10 years, the GDP fell from $103 to $55 billion. There was a sharp decline in dollars value of goods and services and unemployment in US was 25% and wages fell 42%.
GDP can be measured in two parameters : Flow of Product Earning or Cost

Personal consumption Consumer goods and services
Firms
Households
Factors of production (labor, capital, and natural resources) Factor incomes (wages, interest, profit, and rent)
Fig. 2.3 Two parameters for the measurement of GDP Source: Economics, Paul A. Samuelson & William D. Nordhaus Flow of product Every year people consume wide variety of final goods and services like foods, software, cloths and so on. By adding all the consumption rupees, we will arrive at the simplified economy's total GDP. Sum of the annual flow of final goods and services (GDP) = (price of food X amount of food) + (price of software X number of software) + (price of cloths X number of cloths)
Earning or cost The second equivalent way to calculate GDP is earning or cost approach. All costs like wages, rent, profits are considered in this calculation. Annual flow of earnings and income also come under GDP.
2.1.1 Entities of GDP Personal consumption Personal consumption is a flow variable that measures the value of goods and services purchased by households during a time period. Purchases of groceries, health-care services, clothing, automobiles and so forth. all are counted as consumption.
Private investments Gross private domestic investment is the value of all goods produced during a period for use in the production of other goods and services. Like personal consumption, gross private domestic investment is a flow variable. It is often simply referred to as private investment. A hammer produced for a carpenter is private investment. A printing press produced for a magazine publisher is private investment.
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Government purchases Government agencies at all levels purchase goods and services from firms. They purchase office equipment, vehicles, buildings, janitorial services, and so on. Many government agencies also produce goods and services. For example, police departments produce police protection: public schools produce education, and the National Aeronautics and Space Administration (NASA) produce space exploration. Government purchases are not the same thing as government spending. Much government spending takes the form of transfer payments, which are payments that do not require the recipient to produce a good or service in order to receive them. Transfer payments include social security and other types of assistance to retired people, welfare payments to poor people, and unemployment compensation to people who have lost their jobs.
Net export Sales of a countrys goods and services to buyers in the rest of the world during a particular time period represent its exports. Whereas, imports are purchases of foreign-produced goods and services by a countrys residents during a period. Subtracting imports from exports yields net exports. Net Export (Xn) = Export (X) Imports (M)
2.3 GDP at Factor Cost and GDP at Market price

In an economy, money flows in a circular manner, from producer to consumer and back from consumer to producer. Hence, goods and services can be converted into monetary terms in two ways: Market value of goods and services Payments for factor inputs The calculation for GDP defined earlier is called as GDP at Market Price. This includes all indirect taxes and excludes subsidies. On the contrary, GDP at Factor Cost excludes all indirect taxes and includes subsidies given by the government. GDP at Factor Cost = GDP at Market Price Indirect Taxes + Subsidies
2.4 Gross National Product (GNP)

GNP is the combined value of all the final goods and services produced in a country during an accounting year, including net factor income from foreign countries. GNP = GDP + NFIA Where, NFIA = Net Factor Income from Abroad
2.5 Net Domestic Product and Net National Product

While calculating GDP and GNP, we ignore the depreciation of assets and capital consumption. In order to arrive at NDP (Net Domestic Product) and NNP (Net National Product), we deduct the depreciation from GDP and GNP. NDP = GDP Depreciation NNP = GNP Depreciation
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2.6 Real and Nominal GDP

Calculating the GDP in a particular year using the actual market prices of that year gives us nominal GDP. But general interest is more towards real GDP, which is an index of quantity of goods and services produced. We get the real GDP by multiplying the quantity of goods to the set of its fixed price. When we divide nominal GDP by real GDP, we will get GDP deflator. GDP Deflator = Nominal GDP / Real GDP
2.7 Per Capita Income and Personal Disposable Income

The average income of the people of a country in a particular year is called per capita income. Per capita income can be derived by dividing national income by total population. Per Capita Income = National Income / Total Population Since it is calculated on the basis of national income, therefore it is referred to as per capita NNP, per capita GNP or per capita GDP. Personal Disposable Income is received by the individuals of a country from all sources before direct taxes in one year. Personal Disposable Income = Personal Income Personal Taxes
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Summary
This chapter covered the definition and meaning of Aggregate Demand and Aggregate Supply, which are important tools in macroeconomics for measuring various events of economics. Aggregate Demand is the relationship between total quantity of goods and services demanded. Aggregate Supply refers to the total quantity of goods and services that a particular nation is willing to produce and sell in given period. Aggregate supply also depends upon the price level and cost of production, output generated and the optimum utilization of scarce resources (land, labour and capital). Next it discussed the aggregate demand and supply curve and also the equilibrium point. In equilibrium point the buyer and the supplier both are satisfied with purchase and sell of goods and services. It also discussed the various components of GDP, like personal consumptions, private investments, government purchases and net export. Personal consumption is a flow variable that measures the value of goods and services purchased by households during a time period. Gross private domestic investment is the value of all goods produced during a period for use in the production of other goods and services. Government agencies at all levels purchase goods and services from firms. They purchase office equipment, vehicles, buildings, janitorial services, and so on. Lastly, it covered the various measurements of macroeconomics like GDP, GNP, NNP, NDP, Per Capita Income and Personal Disposable Income and so on.
References
Kimberly Amadeo, (21st December 2009). Economic Depression. useconomy.about.com/od/grossdomesticproduct/f/ Depression.htm. Accessed 12 November, 2010. M.l Jhingan, (2010). Meaning and Measurement of Macroeconomics, Managerial Economics. Delhi. Vrinda Publications Pvt. Ltd. P621-630.
Dr. D.M Mithani, (2008). Business Cycle, Institute of Business Study and Research, Himalaya Publishing House Pvt. Ltd. P560. Paul A. Samuelson, (2002). Economics, Measuring Economic Activity, Massachusetts Institute of Technology, Tata McGraw-Hill Publishing Company. P434-440. Suraj B. Gupta, (2009). Monetary Economic Money and Payment System, The Demand for Money, S. Chand & Company, New Delhi. P179-184.
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Self Assessments
1. GDP is measured as a. Y = C + I + G + Xn b. Y = C + I + G + T c. Y = C + I + T + Xn d. Y = T + I + G + Xn (Where T= Tax) 2. Which of the following is not a final good? a. Chair b. Alumina c. Book d. Bus 3. How many types of demand the firm faces? a. One b. Two c. Three d. Four 4. Which of the following is not included in GDP at market price? a. Direct Tax b. Indirect Tax c. Subsidies by Government d. Per capita Income 5. Income received by the individuals of a country from all sources before direct taxes in one year is called as: a. Per Capita Income b. Personal Disposable Income c. Gross National Income d. National Income 6. Where do we include depreciation of assets and capital consumption? a. GDP b. GNP c. NDP d. Disposable income 7. Per capita income can be derived by dividing national income by ------------------a. total income b. total population c. GDP d. NNP
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8. Payments including social security and other types of assistance to retired people, welfare payments to poor people, and unemployment compensation to people who have lost their jobs are called as -----------------. a. transfer payments b. charity payments c. real payments d. nominal payments 9. Total quantity of goods and services that a particular nation willing to produce and sell in given period is called as ---------------. a. aggregate demand b. aggregate supply c. demand d. supply 10. National Aeronautics and Space Administration (NASA) producing space exploration is an example of ---------------------. a. private investments b. government purchases c. net export d. NASA investment
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Chapter III Consumption Investment & Supply of Money

Aim
The aim of this chapter is to: define the concept of consumption, investment and basics of money supply in terms of high powered money supply explain to the students the various terms of money supply
Objectives
The objectives of this chapter are to: list various categories of consumption explain the concept of break-even point evaluate the marginal propensity to consume with the help of graph define the concept of investment and its various elements like cost and revenue formulate the various concepts of money supply list the components of high powered money supply
Learning Outcome
After reading this chapter, the students are supposed to understand: consumption and investment function various aspects of money supply relationship between high powered money supply and money supply the types of money supply used in India
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3.1 Meaning and Definition of Consumption

In the last chapter, we discussed that consumption is one of the single largest component of GDP. Some of the most important categories of consumptions are mentioned in the table below. Categories of Consumptions Durable Goods Nondurable Goods Motor vehicles and parts Food Furniture and household equipments Clothing Others Energy goods Others
Services Housing Household operations Transportation Medical care
Table 3.1 Categories of consumptions One of the most important relationships in all macroeconomics is consumption function. The consumption function shows the relationship between the level of consumption expenditure and the level of disposable personal income. This concept was introduced by Keynes and he derived that there is a stable relationship between consumption and income. The consumption function graph is shown in Fig. 3.1 as per the data given below. Net saving (+) or dissaving (-) -110 0 +150 +400 +760 +1,170 +1,640
Disposable income A B C D E F G 24,000 25,000 26,000 27,000 28,000 29,000 30,000
Consumption 24,110 25,000 25,850 26,600 27,240 27,830 28,360
Table 3.2 Consumption data
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C E E D F
v Sa
in
g
Consumption function
28000 Consumption expenditures 26000 24000 22000 20000 C Break-even point B A
Consumption
45o 0 20,000 Disposable income
E 22,000 24,000 26,000 28,000 30,000
Dl
Fig. 3.1 Plot of Consumption function In the above graph, X axis shows the disposable income and Y axis shows the consumption expenditure. Each of the income consumption combination is represented by a single point and then the points are connected by a smooth curve. Break-even Point: In the figure, both X and Y axes are at the same distance from the 45 degree line. At any point from that line, the distance up from horizontal line and vertical line remains same. The 45 degree tells that whether the consumption spending is equal, greater than or less than the level of disposable income. The Break-even point on the consumption schedule that intersects the 45 degree line represents the level of disposable income at which households just break even. The Break-even point B, where the consumption is exactly equal to the disposable income, the household is neither a borrower nor a saver. The relationship between consumption and income can be seen by examining the thin black line from E' to E. At income 28,000, the level of consumption is 27, 240. We can see that if the consumption is less than income, then the consumption function lies below the 45 degree line. The 45 degree line tells us that to left of point B, the household is spending more than its income. Excess of consumption over income shifts the curve to the left of 45 degree line.
3.1.1 Marginal Propensity to Consume (MPC) In general, we know that changes in income make the changes in consumption. This concept is called as Marginal Propensity to Consume or MPC. The MPC is the extra amount that people consume when they receive an extra dollar of disposable income. Propensity to consume means the desired level of consumption. From the table below, we can find the MPC:
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A B C D E F G
Disposable Income in Rupees 24,000 25,000 26,000 27,000 28,000 29,000 30,000
Consumption 24,110 25,000 25,850 26,600 27,240 27,830 28,360
MPC 890 / 1000 = .89 850 / 1000 = .85 750 / 1000 = .75 640 / 1000 = .64 590 / 1000 = .59 530 / 1000 = .53
Table 3.3 Marginal propensity to consume
C E E F
28000 Consumption expenditures 26000 A 24000 22000 20000 C B
D $ 850
$ 1,000
45o 0 20,000 22,000 24,000 26,000 Disposable income

Fig. 3.2 The MPC curve
E 28,000 30,000
Dl
The figure shows how to calculate MPC graphically. Near point B and C, a little right triangle is drawn. The slope of consumption function, which measures the change in consumption per dollar change in disposable income, is the marginal propensity to consume.
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3.2 Investment
This part focuses on Gross Private Domestic Investments or I. The major types of gross private investments are in buildings and infrastructure, business fixed equipments, software and additional inventory and so on. Business will earn profit if the revenue will be more than the cost of investments.
Investment has two main elements - revenue and cost. Revenues If the firm sells more products, then the revenue of that firm will be more. The selling capacity of the firm is more if it focuses on proper investment and planning. The overall output or GDP will be an important determinant of investment. That means investment depends upon the revenues generated by overall economic activity.
Cost The second important determinant of level of investment is the total cost of investment. Investors basically raise the funds by borrowing for buying capital goods. There is a cost of borrowing, which is the interest rate on borrowed funds. Interest rate is the price paid for borrowing money for a period of time. Taxes can have major effects on investments. Sometimes the government gives tax breaks to particular activities or sectors.
Investment and demand curve To show the relationship between interest rate and investment, economist use a schedule called investment demand curve. Changes in the interest rate should have an effect on the investment. A fall in the interest rate should decrease the cost of investment. The inverse relationship between investment and rate of interest is shown in the figure.
M
Rate of Interest R1
ar
gin
al
Ef
fic ie
nc
y o
f C
R2
ap
ita
I1
I2
Planned Investment
Fig. 3.3 Marginal efficiency of capital
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3.3 Money Supply

Like other commodity, money is also governed by demand and supply forces. It is valuable as long as it is used for purchasing goods and services. There are some objects which are used for multiple purposes; money comes under the category of such objects. For example, money is used for purchasing car, TV or any other commodities; similarly it is used for medical care, education, insurance and other services.
Similarly there are many functions of money which can be studied under the following points: Medium of exchange Value measurement
Medium of exchange: Previously, in barter system, goods were exchanged for goods. For example, if someone wants rice and he has sugar and other person wants sugar but he has rice then both of them will exchange some part of their commodity to get the other good. If the person doesnt get someone who has rice, then it is difficult for him to get rice. So to resolve this problem, money proves to be the most convenient medium of exchange. Value measurement: Accustomed to exchange things for money, people gradually learned to appraise all commodities in terms of money, and to adjust all exchanges by comparing the money values. Thus, money provides common denominator to all types of goods and services. 3.3.1 Exogenous and Endogenous Process of Money Supply Exogenous process of money supply: If the money supply is determined by Central Bank then it is called as Exogenous Money Supply. Endogenous process of money supply: In endogenous process of money supply, the money comes into existence as needed by real economy, which means the bank can raise or drain money as per the demand of money. For example, if there is change in economic activity, then there must be a change in the interest rate on money deposited in bank. 3.3.2 High Powered Money and Money Supply High Powered Money is the sum of commercial bank reserved and the currency held by public. Money supply varies directly with changes in monetary base, and inversely with the currency and reserve ratio.
The High Powered Money (H) is the sum total of currency (C), required reserves (RR) and excess reserves (ER); H = C + RR + ER The Money Supply (M) consists of deposits of commercial banks (D) and currency (C) held by the public; M=D+C The relationship between High Powered Money and Money Supply can be expressed by taking the ratio of both. So; M / H = (D + C) / (C + RR + ER) (1) Divide numerator and denominator of right hand side equation (1) by D; M / H = [(D + C) / D] / [(C + RR + ER) / D] Or M / H = (1 +C / D) / (C/ D + RR / D + ER / D) (2)
Reserve Ratio: It is the amount of money or liquid assets that the Commercial Bank must hold to customer deposit i.e. the
amount that the bank surrenders with the central bank.
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By substituting Cr for C / D, RRr for RR / D and ERr for ER / D equation (2) becomes; M / H = (1 + Cr) / (Cr + RRr + ERr) Thus, the High Powered Money becomes; H = [(Cr + RRr + ERr)] / [(1 + Cr)] X M Hence, The Money Supply is; M = [(1 + Cr)] / [(Cr + RRr + ERr)] X H
3.3.3 Measures of Money Supply in India There are four measures of money supply in India, denoted by M1, M2, M3 and M4. M1 is the first measure of money supply. It consists of : Currency with the public which includes coins and notes of all denomination Demand deposit with commercial and cooperative bank Other deposits with RBI which includes current deposits of foreign central bank, financial institutions and so forth.
M2 is the second measurement of money supply. It includes : M1 plus post office savings and bank deposits Majority people of rural and urban area prefer to save in post office rather than bank because of the safety purpose.
M3 is the third measure of money supply in India. It consists of : M1 plus time deposits with commercial and cooperative banks, excluding interbank time deposits. M4 is the fourth measure of money supply consisting : M3 plus total post office deposits comprising time deposits and demand deposits as well.
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Summary
This chapter covered the meaning and definition of consumption and its functions. The entire consumption function is derived with the help of graph and it also elaborated the term Breakeven Point; where total consumption is equal to the disposable income. Next it discussed the Marginal propensity to consume, which is the extra amount that people consume when they receive an extra dollar of disposable income. Then it discussed the term investment and also terms used in it - revenue, and cost. If the firm sells more products then the revenue of that firm will increase. The selling capacity of the firm is depends on proper investment and planning. Cost of investment is another important element of investment. Money supply is categorized as exogenous and endogenous money supply. The High Powered Money is the sum total of currency, required reserves and excess reserve. Lastly, it covered the four types of money supply in India, denoted as M1, M2, M3 and M4.
References
John Thom Holdsworth, (2009). Measure of Value. chestofbooks.com. hestofbooks.com/finance/banking/MoneyAnd-Banking-Holdsworth/10-Measure-Of-Value.html. Accessed 15 November, 2010. M. L. Jhingan, (2009). Managerial Economics. Money Supply. Vrinda Publications Pvt. Ltd, New Delhi. P681, P684, P687.
Dr. D.M. Mithani, (2008). Institute of Business Study and Research. Himalaya Publishing House Pvt. Ltd. P495. Paul A. Samuelson, (2002). Economics, Massachusetts Institute of Technology. Tata McGraw-Hill Publishing Co. P459-469. Suraj B. Gupta, (2009). Monetary Economics, Money and Payment System. S. Chand & Company, New Delhi. P15.
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Self Assessment
1. Which of the following is a durable good? a. Fuel b. Furniture c. Medical care d. Food 2. The point where total income is equal to the consumption is known, a. Saturation point b. Equilibrium point c. Break-even point d. Marginal point 3. Changes in income make the changes in consumption. This concept is called, a. Marginal Propensity to Consume b. Marginal Return c. Marginal Utilization d. Marginal Cost 4. Which of the following is a gross investment? a. Investment in infrastructure b. Investment in personal laptop c. Investment in share market d. Investment in foreign trade 5. M2 money supply includes; a. Currency with the public which includes coins and notes of all denomination b. Demand deposit with commercial and cooperative bank c. M1 plus post office savings and bank deposits d. Deposits with RBI 6. In exogenous money supply is determined by a. The Central Bank b. The Cooperative Bank c. The Federal Bank d. The Post Office 7. The amount of money or liquid assets that the commercial bank must hold to customer deposit, i.e. the amount that the bank surrenders with the central bank is known, a. Reserve ratio b. GDP c. Per capita income d. Disposable income
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8. Consumption depends upon which of the following variable? a. Disposable income b. Per capita income c. GDP d. GNP 9. Which of the following is not the category of consumption? a. Durable goods b. Nondurable goods c. Services d. Giffen goods 10. Excess reserve comes under a. High Powered Money Supply b. Money Supply c. GDP d. GNP
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Chapter IV Business Cycle and Inflation

Aim
The aim of this chapter is to: define the meaning and concept of business cycle explain the phases of business cycle by giving the real time example describe the basic concept of inflation discuss the measurement of inflation based on demand and cost
Objectives
The objectives of this chapter are to: list the various phases of business cycle explain business cycle with the help of real time example study the current data of recession and expansion identify the impact of recession describe the basic concept of inflation including price and money inflation explain the causes of inflation and it various measurements developed by the government
Learning Outcome
After reading this chapter, the students are expected to understand: the basics of business cycle and its phases how the fluctuation occurs in business based on monetary and non monetary basis the causes of inflation and its impact on business various measurements developed by the government to control inflation
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4.1 Meaning and Definition of Business Cycle

Business Cycle is nothing but the fluctuation of national output, income and employment. This fluctuation usually sustains for a period of more than 2 to 10 years. There are four phases of business cycle as shown in the figure: Trough, when the output level reaches at the bottom Expansion, when the economic real output is rising from trough Peak, when the output level reaches to a high level, that means the economy is at higher position Recession, when the economic output is declining from the peak phase.
Recession
Peak
Peak
Business conditions
Peak
Trough
Ex
pa
ns
n
ion
4.1.1 Real Example of the phases of business cycle In the year of 2008, America's financial system faced a severe credit crunch, which gave rise to a worst recession in the U.S. This was the serious risk for U.S. financial market as huge credit and assets bar collapsed. All the sectors, starting from automobile to the real estate, were affected severely because of recession. Many economists consider this to be the worst financial crisis since the Great Depression of the 1930s. It contributed to the failure of key businesses, decline in consumer wealth, which is estimated in the hundreds of billions of U.S. dollars, crash in substantial financial commitments incurred by governments, and a significant decline in economic activity. Table below shows some turning point dates of the current economy: Peak Dates Trough Dates September 1984 October 1985 November 1989 September 1993 October 1995 November 1996 November 1997 April 1999 December 2000 February 2005 March 2008 May 2009 Table 4.1 Turning point dates of current economy (Source: 2010 Federal Reserve Bank of St. Louis)
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n Co sts rac tio
Trough
Recession
Fig. 4.1 Phases of business cycle
4.1.2 Characteristics of Recession in Business Cycle Following are few characteristics of recession: Consumer purchases decline sharply, even if the inventories of business increase unexpectedly. The unemployment rate is higher because organizations opt for cost cutting by decreasing labor count. Inflation falls as the demand for crude materials declines. Wages and prices of services are unlikely to decline. Business profit falls sharply in recession. Common stock prices usually fall as investors sniff a business downturn. However, because the demand for credit falls, interest rates also generally fall in recession.
4.2 Inflation
The rate at which the general level of prices for goods and services rises and subsequently, purchasing power falls is called as inflation. We can also say that it is the persistent increase in the general price level or persistent decline in the real income of people. Economists have categorized inflation into two main parts: Price Inflation Money Inflation Both price and money inflation are interrelated, that means they come under cause and effect relationship. Price inflation is the effect of money inflation. When the supply of money increases, the price level of goods and services will also increase simultaneously.
Now the question arises - how and why the supply of money increases? The supply of money may increase either by additional printing of currency as per the demand of the government to meet the expenditure or due to the loans and aids from world institutions like the World Bank. Other sources of additional money supply are foreign exchange, inflows in the form of capital, like FDI (Foreign Direct Investment) and so on.
4.2.1 Causes of Inflation The major causes of inflation are: Excess Money Supply Demand Pull Inflation Cost Push Inflation
Excess Money Supply When money inflation leads to price inflation, the phenomenon is known as monetarism. For a very long time, money supply was accepted as the single most important cause of price rise, because it can be directly linked with increase in aggregate demand.
Demand Pull Inflation Demand pull inflation occurs when the demand is more in comparison to the supply. Due to increased demand, the price of the commodity also increases, which causes inflation. The figure shows the graph of demand pull inflation.
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In the Short Run Aggregate Price Level GDP deflator r1 r0 AD1 Real GDP Price ASO Real GDP
AD0 Y0 Y1
Aggregate Output Fig. 4.2 Demand pull inflation In demand pull inflation, the GDP (national output) is more which helps in reducing unemployment problem to some extent. Reasons for demand pull inflation Majority of commercial firms of a nation offer employment to fulfill the demand for goods and services. So the aggregate demand rises, which pushes the commercial firms to employ more labor force to derive maximum output.
Cost push inflation Cost push inflation is the other side of price determination in supply. It is a situation where demand remains unchanged and still the price increases. This may happen due to change in supply pattern, if the producer continues to produce the same output even if the input prices changes. Increase in costs of production cause the aggregate supply curve to shift to left. This may occur if there is increase in the costs of the factor inputs or if there is a supply shock such as a drought. When a firms input cost increases, it will hike the prices of output to maintain the level of their profits. This may result in the fall of real incomes of the owners. In an attempt to maintain their real income, labor will demand higher money wages and this will in turn raise costs.
Prime reasons for cost push inflation could be: increases in factor prices, e.g. oil price increase increase in wage settlements in excess of any increase in productivity devaluation or depreciation of currency leading to an increase in import prices rise in interest rate which increases the cost of borrowing indirect taxation or the removal of subsidies.
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SRAS1 Aggregate Price Level P1 GDP deflator P0 AD Real GDP SRAS
Oil Price Increases AS shifts to 1 Price level Increases
AD0 Aggregate Output Y1 Y0=Ye
Fig. 4.3 Cost push inflation curve 4.2.2 Measurement of Inflation As far, we discussed that inflation is nothing but taking more amount of money from your pocket and adding less quantity of goods to consumption basket with or without any improvement in the quality and quantity of goods. So the government uses a common term to measure the inflation called inflation rate. Other way of measurement used is called as indices. Price index is a numerical measure which is designed to compare that how the price of some class of goods and services differ between time periods or geographical locations. It is the ratio of Current Year's Price and Base Year's Price. Price Index = [Current Year's Price / Base Year's Price] X 100
Some of the important price indices are as mentioned below: Producer Price Index (PPI) Producer Price Index measures the average change in prices received by domestic producers for their output. The PPI concentrates on the area of industry based production and stage of processing based companies. It keeps track of the prices of foods, metals, oil and gases, and many other commodities except the price of services. It has been using the Standard Industrial Classification system to collect and record the data for many years.
Wholesale Price Index (WPI) When inflation is calculated on the basis of wholesale prices of a wide variety of goods, it is called as Wholesale Price Index (WPI). In India, WPI is available on weekly basis, while in U.S. WPI has already been replaced by PPI.
Consumer Price Index (CPI) It measures the prices of selected goods purchased by a "typical consumer." The CPI is calculated by taking price changes for each item in the predetermined basket of goods and averaging them; the goods are weighted according to their importance. Changes in CPI are used to assess price changes associated with the cost of living.
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Summary
This chapter covered the basic concept of business cycle and its phases like trough, expansion, peak and recession. It also explained the trough date and peak date of current economy in India. It also described the impact of business due to recession. Next, it covered the meaning and definition of inflation. Economists categorize the inflation into two parts, viz. price inflation and money inflation. Both inflations are interrelated, that means they come under cause and effect relationship. Price inflation is the aftereffect of money inflation. Then it described the various causes of inflation like Demand Pull, Money Supply and Cost Push Inflation. Demand pull inflation occurs when the demand is more in comparison to the supply. Cost Push Inflation is a situation where demand remains unchanged and still the price rises. Lastly, it covered the measures of inflation like PPI (Producer Price Index), WPI (Wholesale Price Index), and CPI (Consumer Price Index).
References
Federal Reserve Bank of St. Louis, (2010). Global Expansion of World. research.stlouisfed.org. research. stlouisfed.org/economy/intl/italy.pdf. Accessed 17 November, 2010. Janamitra Devan, Micah Rowland, and Jonathan Woetzel, (August 2009). A Consumer Paradigm for China. mkqpreview1.qdweb.net. http://mkqpreview1.qdweb.net/A_consumer_paradigm_for_China_2429. Accessed 17 November, 2010. Nouriel Roubini, (26th February, 2008). Stern School of Business, New York University. msnbcmedia.msn.com. msnbcmedia.msn.com/i/msnbc/sections/tvnews/nightly%20news/roubini022608.pdf. Accessed 17 November, 2010. The Times of India, November 15, 2010, New Delhi. Inflation Dips to 8.85%.
Geetika, (2008). Managerial Economics. Money Supply and Economics. Tata McGraw-Hill Publishing Co. New Delhi. P466-474. M. L. Jhingan, (2009). Managerial Economics. Money Supply. Vrinda Publications Pvt. Ltd. New Delhi. P681, P742-750. Paul A. Samuelson, (2002). Economics. Massachusetts Institute of Technology. Tata McGraw-Hill Publishing Co. P478.
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Self Assessment
1. The phase when the economic output is declining is called as -------------------. a. peak b. recession c. contraction d. expansion 2. Business profits falls due to ----------------a. inflation b. recession c. business downturn d. credit crunch 3. Money inflation depends upon which of the following concept? a. Price inflation b. Demand inflation c. Cost inflation d. Supply inflation 4. Price inflation is the effect of -------------. a. money inflation b. demand inflation c. cost inflation d. supply inflation 5. Which of the following is not a cause of inflation? a. Demand Pull Inflation b. Cost Push Inflation c. Excess Money Supply d. Maximum Employment 6. In Demand pull inflation which of the following statement is false? a. The GDP will decline. b. The GDP will rise. c. Unemployment will decline. d. Supply will be less. 7. What measures the price of a selection of goods purchased by a typical consumer? a. WPI b. CPI c. PPI d. NNP
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8. The average change in prices received by domestic producers for their output is known as ----------. a. WPI b. CPI c. PPI d. NNP 9. ------------ is using the Standard Industrial Classification system to collect and record the data for many years. a. WPI b. CPI c. PPI d. NNP 10. 1Which of the following is available in weekly basis? a. WPI b. CPI c. PPI d. NNP
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Chapter V Monetary Policy

Aim
The aim of this chapter is to: define the meaning of Monetary Policy with the help of real time examples list the various monetary measurements for calculating the financial condition of a nation.
Objectives
The objectives of this chapter are to: evaluate the relationship between money supply and inflation study the various objectives of monetary policy explain the tools of monetary policy establish a relationship between monetary policy, target of money supply and objectives of monetary policy list the various economic concepts which are used for calculating the financial condition of a nation.
Learning Outcome
After reading this chapter, the students are expected to understand: the concept of money supply and the rotation of money tools of monetary policy fluctuation in inflation due to the supply of money variation in inflation and its various measurements which helps in balancing the economic condition of a nation.
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5.1 Meaning and Definition of Monetary Policy

Monetary policy refers to the measurement of growth rate and size of money supply; this process is carried out by the central bank. Monetary policy is a way in which the government controls economy. It affects the interest rate. If money supply is too fast then the inflation will rise and if it goes too slow then the nation's output will be less, hence GDP will be low. So there must be controlled money supply to maintain the economy a nation. For example, if the salary of the employees of a particular organisation is increased by 20%, then they may start thinking about purchasing new TV, laptops and so on. Fulfilling this increased demand will take some time and in between this gap, the equation of supply and demand gets imbalanced as demand is more than the supply. This shortage of supply leads to price rise of the products, which is nothing but Inflation. In short, Increased Money Supply Increase in the Demand of Product Increase in Price Inflation
5.2 How to Achieve the Goals of Monetary Policy?

Some of the major goals of monetary policy are: rise in employment economic growth low inflation balanced payments.
All these goals are based on the operation of the central bank. It has two main tools to implement the Monetary policy: Open Market Operation Discount Window
Open market operation It is the buying and selling of the government bonds by the central bank. Government buys this bond to pump money into the system which lowers the interest rate. However, if the bonds are sold, the interest rate becomes high as money is taken out from the system.
Discount window Here, the commercial banks borrow reserves from central bank at a discount rate. This rate is set below the market rate; so that the banks can vary in the credit conditions, there by affecting the money supply.
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Tools of Monetary Policy 1. Open Market Operation 2. Discount Window
Goals of Monetary Policy 3. Rise in Employment 4. Economic Growth 5. Low Inflation 6. Balance Payment
Control to get
To achieve
Target of Monetary Policy 1. Money Supply 2. Interest Rate
Fig 5.1 Flowchart for the process of monetary policy (Source: www2.bc.edu)
5.3 Monetary Measures

Various monetary measures are: Bank Rate Repo Rate Reverse Repo Rate Cash Reserve Ratio (CRR)
Bank rate A bank rate is the interest rate that is charged by a countrys central or federal bank on loans and advances to control money supply in the economy and the banking sector. This is typically done on a quarterly basis to control inflation and stabilize the countrys exchange rates. A fluctuation in bank rates triggers a ripple-effect as it impacts every sphere of a countrys economy. For example, the prices in stock market tend to react to interest rate changes. A change in bank rates affects customers as it influences prime interest rates for personal loans. In India, as per RBI (Reserve Bank of India) norms, the bank rate is retained at 6 percent.
Repo rate Whenever the banks have any shortage of funds they can borrow it from RBI. Repo rate is the rate at which banks borrow rupees from RBI. A reduction in the repo rate will help banks to get money at a cheaper rate. When the repo rate increases, borrowing from RBI becomes more expensive. Currently, the repo rate in India is 25 basis points from 5.0 per cent to 5.25 per cent.
Reverse repo rate Reverse repo rate is the rate at which RBI borrows money from banks. Banks are always happy to lend money to RBI since their money is in safe hands with a good interest. An increase in reverse repo rate can cause the banks to transfer more funds to RBI due to attractive interest rates. Currently, the reverse repo rate in India is 25 basis points from 3.5 per cent to 3.75 per cent.
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Cash reserve ratio Cash Reserve Ratio is a bank regulation that sets the minimum reserves each bank must hold to customer deposits and notes. It influences the country's economy, borrowing and interest rate. Currently, the CRR in India is 5.75 percent to 6 percent.
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Summary
This chapter covered the meaning and definition of Monetary policy. It refers to the measurement of growth rate and size of money supply; this process is carried out by the central bank. If money supply is too fast then the inflation will rise and if it goes too slow then the nation's output will be less, hence GDP will be low. Next it discussed the process of achieving the goals in monetary policy. First phase includes the various tools for monetary policy, second phase is the target phase like money supply and interest and the last phase is to achieve the goals like low employment, price stability and economic growth and so on. Then it described the various monetary measures like bank rate, CRR, repo rate and reverse repo rate. A bank rate is the interest rate that is charged by a countrys central or federal bank on loans and advances to control money supply in the economy and the banking sector. Whenever the banks have any shortage of funds they can borrow it from RBI. Repo rate is the rate at which our banks borrow rupees from RBI. Reverse repo rate is the rate at which Reserve Bank of India borrows money from banks. Cash reserve ratio is a bank regulation that sets the minimum reserves each bank must hold to customer deposits and notes.
Reference
India Inflation Rate, (2010). www.tradingeconomics.com. www.tradingeconomics.com/Economics/InflationCPI.aspx?Symbol=INR. Accessed 18 November, 2010. Monetary Policy, (2010). www.finpipe.com. www.finpipe.com/monpol.htm. Accessed 18 November, 18. Reserve Bank of India, (2010-2011). www.rbi.org.in. www.rbi.org.in/scripts/NotificationUser. aspx?Id=5602&Mode=0. Accessed 18 November, 2010.
Geetika, (2008). Managerial Economics, Monetary Policy. Tata McGraw-Hill Publishing Co. New Delhi. P484. M.L Jhingan, (2009). Managerial Economics, Monetary Policy. Vrinda Publications Pvt. Ltd. New Delhi. P681, P717-720. Paul A. Samuelson, (2002). Economics, Central Banking and Monetary Policy. Massachusetts Institute of Technology. Tata McGraw-Hill Publishing Company. P512.
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Self Assessment
1. Measuring the growth rate and size of money supply by the central bank is known as: a. Monetary Policy b. Fiscal Policy c. Economic Policy d. CRR 2. Which of the following is not the goal for monetary policy? a. Rise in employment b. Economic Growth c. Low Inflation d. Gross Domestic Product 3. Government buys the bond to pump money into the system. This is known as -------------. a. open market operation b. discount window c. net national income d. income of government 4. State Bank of India borrowed reserves from RBI in a discount rate. It is known as --------. a. discount window b. open market operation c. discount rate d. bank Rate 5. Which of the following is the target for money supply? a. Discount Window b. Open Market Operation c. Discount rate d. Interest Rate 6. Target of monetary policy is controlled by --------------. a. tools of monetary policy b. fiscal policy c. goals of monetary policy d. economic policy 7. When banks borrow rupees from RBI, it is called as ---------------. a. bank rate b. reserve ratio c. cash reserve ratio d. repo rate
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8. Which of the following influences the country's economy? a. CRR b. GDP c. GNP d. Reverse Repo Rate 9. Which of the following tools of measurement is good for any commercial bank? a. CRR b. GDP c. GNP d. Reverse Repo Rate 10. Bank regulations which set minimum reserves each bank must hold to customer deposits and notes is called a. CRR b. GDP c. GNP d. Reverse Repo Rate
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Chapter VI Fiscal Policy

Aim
The aim of this chapter is to: define the concept of fiscal policy in terms of government expenditure and taxation determine the measurement of various fiscal policies and its applications
Objectives
The objectives of this chapter are to: define the fiscal policy and its applications list the techniques of fiscal policy formulate the equation for balanced budget
Learning Outcome
After reading this chapter, the students are supposed to understand: the concept of fiscal policy and how the government controls various expenditures of a nation economic policy measurement of a nation the concept of balanced budget in terms of income and expenditure
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6.1 Meaning and Definition of Fiscal Policy

Fiscal policy is made by the government to control its expenditure, supply of money and taxes. Government expenditure comes in two distinct forms: Government spending on various goods and services like purchasing of tanks, construction of roads and railways, salaries for judges and so on. Government transfers the payments to the targeted group such as elderly or unemployed people to boost them up.
Taxation is another part of fiscal policy. It affects the overall economy in two ways: Tax affects the prices of goods and factors of production and thereby affecting the incentives and also the behavior of an economy. Tax tends to affect the amount people spend on goods and services as well as amount of private saving. Private consumption and saving have important consequences on investment and output in short run and long run.
If the government budget shows that estimated expenditure is more than the estimated income, then it becomes necessary to formulate fiscal policies to bring in balance in such adverse situation. Here, balanced situation means total expenditure is equal to total income. For this government can use some of the techniques of fiscal policy mentioned below.
6.2 Techniques of Fiscal Policy

Taxation policy Public expenditure Deficit financing policy
Taxation policy By amendment in Indian Tax Law of 1961, the Government of India has the power to make new taxation policy according to the current Indian economic situation. Either government can increase the tax rate or decrease exemption for collecting more tax for previous year income. Public expenditure Public expenditure policy is very useful in reducing the government expenditure. Government divides total expenditures into two major categories: development expenditure non-development expenditure. With this policy, government encourages only development expenditure and tries to reduce non development expenditure.
Deficit financing policy If above two equipment does not work to create balance in government budget, government can get loan from central bank to adjust deficit. For this, the RBI has to issue new currency notes. But this decision should be taken very carefully because increasing trend of deficit financing will decrease the value of currency in world market and it will increase the prices of commodities, which, ultimately, will give rise to inflation.
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6.3 Fiscal Policy during Economic Boom

During the time of economic boom there is a surplus in the budget. In this surplus budget, the government revenues exceed expenditure. The policy of surplus budget is followed to control inflationary pressure within the economy. It may be through increased taxation or reduction in government expenditure or both. This is explained with the help of a graph below. The economy is at initial position named E1. Suppose the government expenditure is reduced by G, so that the total spending function will be C + I + G which shifts downward to C' + I' +G'. Now E is the new equilibrium position which shows that the income has declined to OY from OY' as a result of reduction in expenditure by E1B.
E1
45o C+1+G B A C C+1+G
Expenditure
Y Income
Y1
Fig. 6.1 Fiscal policy in economic boom
6.4 Balanced Budget

Another concept of fiscal policy is balanced budget. In this policy, increase in both taxes (T) and government expenditure (G) is of an equal amount. The balanced budget theorem is based on combined operation of tax multiplier and government expenditure multiplier. Here the tax multiplier is smaller than government expenditure multiplier. Y = (1 / 1-c) / G Or Y / G = 1 / (1-c) (1)
The government expenditure multiplier is,
Where, G = change in government expenditure Y = change in income
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Equation (1) shows that the change in income (Y) will equal the multiplier by (1 / 1-c) times the change in government expenditure. The tax multiplier is, Y = -cT / (1-c) Y / T = -c / (1-c) (2)
Where T = change in Tax c = marginal propensity to consume
Equation (2) shows that the change in income (Y) will equal the multiplier by (1 / 1-c) the product of the marginal propensity to consume (c) and the changes in taxes (T). The balanced budget can be explained by combining the equation (1) and (2), i.e. b = Y / G + Y / T = 1 / (1-c) + [-c / (1-c)] = (1-c) / (1-c) = 1 As G = T, income will change by amount equal to change in government expenditure and taxes.
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Summary
This chapter covered the concept of fiscal policy and its various techniques. It is based on two basics - government expenditure and taxation. The techniques of fiscal policy include taxation policy, public expenditure and deficit financing policy. The government of India has power to make new taxation policy according to the current economic situation. This is called as taxation policy. Public expenditure policy is very useful to reduce the government expenditure. If taxation policy and public expenditure does not work, then financing policy is applied to balance the government budget deficit. Next it discussed the fiscal policy during the economic boom time. During this surplus budget government revenues exceed expenditure. The policy of surplus budget is followed to control inflationary pressure within the economy. Another concept of fiscal policy is balanced budget. In this policy increase in both taxes and government expenditure is of an equal amount.
References
Accounting Education, (2010). Fiscal Policy. www.svtuition.org. www.svtuition.org/2010/03/fiscal-policy.html. Accessed 19 November, 2010. M. L. Jhingan, (2009). Managerial Economics, Money Supply. Vrinda Publications Pvt. Ltd, New Delhi. P681, P727.
Dr. D.M Mithani. (2008). Institute of Business Study and Research. Himalaya Publishing House Pvt. Ltd. P595. Paul A. Samuelson, (2002). Economics. Massachusetts Institute of Technology. Tata McGraw-Hill Publishing Co. P420. Suraj B. Gupta, (2009). Monetary Economics. Money and Payment System, S. Chand & Company, New Delhi. P15.
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Self Assessment
1. Spending on various goods and services like purchasing of tanks, construction of roads and railways, salaries for judges is known as ---------------. a. government expenditure b. taxation c. spending d. wages 2. Which of the following is affected by tax? a. Prices of goods b. Inflation c. Gross Domestic Product d. CRR 3. Which of the following is a balanced situation in economy? a. Saving is equal to income b. Expenditure is equal to income c. GDP = GNP d. Equilibrium in economy 4. Which of the following is used to reduce government expenditure? a. Taxation policy b. Budget deficit policy c. Public expenditure policy d. Deficit policy 5. What will happen in surplus of budget? a. Government revenues will exceed expenditure b. Revenue will exceed profit c. Personal income will exceed expenditure d. Per capita income will exceed expenditure 6. How inflationary pressure can be controlled? a. By increasing tax b. By decreasing tax c. By increasing consumption d. By decreasing consumption 7. In which of the following concept, increase in both taxes and government expenditure is of an equal amount? a. Taxation policy b. Budget deficit policy c. Public expenditure policy d. Balanced budget
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8. Education growth in any nation comes under which of the following expenditure? a. Development expenditure b. Non development expenditure c. Educational expenditure d. Growth expenditure 9. What is the meaning of decrease the value in currency? a. Decrease the numerical value of currency b. Decrease the character value of currency c. Decrease the rate of currency d. Decrease the interest of currency 10. What is the meaning of inflation? a. It is the general rise in prices. b. It is the general rise in prices taking into consideration the purchasing power of common people. c. It is the general fall in prices. d. It is the general fall in cost of production.
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Case Study I
Great Depression of 1929
The Great Depression of 1929 was a worldwide depression that lasted for 10 years. It was a Black Thursday, October 24, 1929, when 12.9 million shares of stock were sold in one day which were triple of the original amount. There was a stock market crash, as share prices fell down by 15-20%.
Unemployment
Till the year 1933, the height of depression and unemployment rate was raised from 3% to 25 % of the total nations workforce. Wages were also lowered. Gross Domestic Product (GDP) was cut in half from $103 to $55 billion. This was partly because of deflation as prices fell down by 10 % every year. The depression had adverse effects on the agriculture land. Hence, many farmers lost their farms. At the same time, the long time erosion and drought created a situation in some places where no crops were grown. Many farmers and other unemployed people travelled to California to find jobs. Most of the people were left homeless. Thus, the unemployment was raised to a greater extent.
Causes of Great Depression

According to Ben Bernake, the Chairman of the Federal Reserve, the main reason behind the stock market crash and consequent depression was the tight monetary policies that the Federal Reserves established at that time. Bernake highlighted several Federal mistakes which caused the depression: The Federal Reserves did not increase the supply of money to fight against the depression. They raised the interest rates to preserve the value of dollar. This further caused unavailability of money for businesses, leading to bankruptcies. The Federal had raised the funds rate and kept on increasing throughout the recession that began in August 1929. This was the root cause for stock market crash. As investors withdrew all their dollars from banks, the banks failed and there was more fear. The people had no confidence with the banks. Most of the people withdrew their cash and just accumulated with them, which further decreased the money supply.
Questions
1. Why the unemployment rate increased in USA during 1929? Answer: The unemployment rate was raised from 3% to 25 % of the total nations workforce. Wages were also lowered. GDP was cut in half from $103 to $55 billion. This was partly because of deflation as prices fell down by 10 % every year. The depression had adverse effects on the agriculture land. Hence, many farmers lost their farms. At the same time, the long time erosion and drought created a situation in some places where no crops were grown. Many farmers and other unemployed people travelled to California to find jobs. Most of the people were left homeless. Thus, the situation of unemployment was raised to a greater extent. 2. What was the main cause of depression in USA? Answer: The main cause of great depression in USA was the tight monetary policies established by the Federal Reserves at that time.
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3. How was the Federal Reserve responsible for depression and stock market crash? Answer: The Federal Reserves had committed following mistakes that lead to great depression and stock market crash: The Federal Reserves did not increase the supply of money to fight against the depression. They raised the interest rates to preserve the value of dollar. This further caused unavailability of money for businesses, leading to bankruptcies. The Federal had raised the funds rate and kept on increasing throughout the recession. This was the root cause for stock market crash. As investors withdrew all their dollars from banks, the banks failed, which resulted in more panic. The people had no confidence with the banks. Many people withdrew their cash and just accumulated with them, which further decreased the money supply.
4. Explain how the monetary policy affects the economy of a nation? Answer: Monetary Policy affects the rate of interest. It is the way in which the government controls the economy. If money supply goes too fast then the inflation rises and if it goes too slow then the nation's output lessens, that means the GDP also decreases. So the money supply must be controlled so that it would not change the economic level of a nation.
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Case Study II
Japanese Business Cycle (1945 - till now)
After the World War II, Japan was totally devastated in the bombings of Hiroshima and Nagasaki. There was scarcity of all the necessary goods. As a result, the price of the products were significantly increased which lead to high inflation. There were no jobs, and people could not afford the high priced commodities. That is why; there was no flow of money in the market. Due to this situation, there was along-lasting recession in the economy. From the 1960s to the 1980s, Japans overall real economic growth has been considered as a miracle - a 10% average in the 1960s, a 5% average in the 1970s and a 4% average in the 1980s Growth was considerably slowed down in the late 1990s. This period was called "the Lost Decade." The bank of Japan failed to cut interest rates quickly enough to counter after effects of over-investment during the late 1980s. Some economists believe that because the Bank of Japan failed to cut rates, Japan entered a liquidity trap. Therefore, to increase economic growth, Japan ran massive budget deficits (added trillions in Yen to Japanese financial system) to finance large public works programs. By 1998, Japan's public works projects still could not stimulate enough demand to end the economy's stagnation. In extreme anxiety, the Japanese government undertook "structural reform" policies planned to twist tentative excesses from the stock and real estate markets. Unfortunately, these policies led Japan into deflation at numerous times between 1999 and 2004. By late 2005, the economy was able to recover slowly. GDP growth for that year was 2.8%, with an annualized fourth quarter expansion of 5.5%, exceeding the growth rates of the US and European Union during the same period. Thus, the domestic consumption has been the dominant factor for the growth of economy. Eventually, a carry trade developed in which money was borrowed from Japan, invested for returns elsewhere and then the Japanese were paid back, with a nice profit for the trader. The improvements to bankruptcy law, land transfer law, and tax laws increased the economic growth. In recent years, Japan has been the top export market for almost 15 trading nations worldwide.
Questions
1. 2. 3. 4. Why did Japan face deflation from 1999 to 2004? How Japan increased its rate of economic growth? Which was the dominant factor for the growth of economy in Japan in 2005? How is the GDP calculated?
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Case Study III

The Indian Economy Dealing with Inflation in 2006-07
In the early 2007 and the end of 2006, the inflation rate in India was around 6-6.8%. Previously, the main cause of high inflation in India was the rise in global oil prices. However, in early 2007, the main reason for the inflation was the increase in the prices of food articles which was caused by increased demand as well as supply constraints. According to analysts, the increased demand was because of high economic growth and increased money supply, while the stagnant agricultural productivity caused supply constraints.
Causes of Inflation
Generally, the two main reasons behind inflation are: rise in demand or demand pull inflation rise in cost of factor production or cost push inflation.
The average annual GDP growth in the 2000s was about 6% and during the second quarter (July-September) of fiscal 2006-2007, the growth rate was as high as 9.2%. This was definitely going to increase the demand for goods. However, the growth in the supply of goods, especially food articles such as wheat and pulses, was not increasing directly with the growth in demand. As a result, the prices of food articles increased considerably. Measures Taken to Control Inflation In late 2006 and early 2007, the RBI announced some measures to control inflation. These measures were as follows: increase the repo rates increase the Cash Reserve Ratio (CRR) reduce the rate of interest on cash deposited by banks with the RBI.
With the increase in the repo rates and bank rates, banks had to pay a higher interest rate for the money they borrowed from the RBI. Consequently, the banks increased the rate at which they lent to their customers. The increase in the CRR reduced the money supply in the system because banks now had to keep more money as reserve.
Questions
1. 2. 3. 4. What were the causes of inflation? In India, why the inflation rate increased in 2006-07? How inflation rate can be controlled? What happens when banks increases the repo rates and bank rates to control inflation?
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Bibliography
References
Accounting Education, (2010). Fiscal Policy. www.svtuition.org. www.svtuition.org/2010/03/fiscal-policy.html. Accessed 19 November, 2010. Annual Report to the people on employment, Government of India, Ministry of Labor and Employment. (1st July 2010). http://labour.nic.in/Report_to_People.pdf. Accessed 10 November, 2010. Federal Reserve Bank of St. Louis, (2010). Global Expansion of World. research.stlouisfed.org. research. stlouisfed.org/economy/intl/italy.pdf. Accessed 17 November, 2010. Frank Shostak, (September 21st 2010). Unemployment is the key to US Economy. http://mises.org/daily/4724. Accessed 10 November, 2010. India Inflation Rate, (2010). www.tradingeconomics.com. www.tradingeconomics.com/Economics/InflationCPI.aspx?Symbol=INR. Accessed 18 November, 2010. Introduction to Macroeconomics, http://www.scribd.com/doc/12374776/Overview-of-Macroeconomics. Accessed 10 November, 2010. Janamitra Devan, Micah Rowland, and Jonathan Woetzel, (August 2009). A Consumer Paradigm for China. mkqpreview1.qdweb.net. http://mkqpreview1.qdweb.net/A_consumer_paradigm_for_China_2429. Accessed 17 November, 2010. John Thom Holdsworth, (2009). Measure of Value. chestofbooks.com. hestofbooks.com/finance/banking/MoneyAnd-Banking-Holdsworth/10-Measure-Of-Value.html. Accessed 15 November, 2010. Kimberly Amadeo, (21st December 2009). Economic Depression. useconomy.about.com/od/grossdomesticproduct/f/ Depression.htm. Accessed 12 November, 2010. M. L. Jhingan, (2009). Managerial Economics, Money Supply. Vrinda Publications Pvt. Ltd, New Delhi. P681, P727. M. L. Jhingan, (2009). Managerial Economics. Money Supply. Vrinda Publications Pvt. Ltd, New Delhi. P681, P684, P687. M.l Jhingan, (2010). Meaning and Measurement of Macroeconomics, Managerial Economics. Delhi. Vrinda Publications Pvt. Ltd. P621-630. Monetary Policy, (2010). www.finpipe.com. www.finpipe.com/monpol.htm. Accessed 18 November, 18. Nouriel Roubini, (26th February, 2008). Stern School of Business, New York University. msnbcmedia.msn.com. msnbcmedia.msn.com/i/msnbc/sections/tvnews/nightly%20news/roubini022608.pdf. Accessed 17 November, 2010. Reserve Bank of India, (2010-2011). www.rbi.org.in. www.rbi.org.in/scripts/NotificationUser. aspx?Id=5602&Mode=0. Accessed 18 November, 2010. The Times of India, November, 15, 2010, New Delhi. Inflation Dips to 8.85%. United Nations Department of Economic and Social Affairs, World Summit for Social Development Copenhagen 1995 Expansion of Productive Employment and Reduction of Unemployment. http://www.un.org/esa/socdev/ wssd/pgme_action_ch3.html. Accessed 10 November, 2010.
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Dr. D.M Mithani, (2008). Business Cycle, Institute of Business Study and Research, Himalaya Publishing House Pvt. Ltd. P560. Dr. D.M Mithani, (2008). Institute of Business Study and Research, Himalaya Publishing House Pvt. Ltd. P578. Dr. D.M Mithani. (2008). Institute of Business Study and Research. Himalaya Publishing House Pvt. Ltd. P595. Dr. D.M. Mithani, (2008). Institute of Business Study and Research. Himalaya Publishing House Pvt. Ltd. P495. Geetika, (2008). Managerial Economics, Monetary Policy. Tata McGraw-Hill Publishing Co. New Delhi. P484. Geetika, (2008). Managerial Economics. Money Supply and Economics. Tata McGraw-Hill Publishing Co. New Delhi. P466-474. M. L. Jhingan, (2009). Managerial Economics. Money Supply. Vrinda Publications Pvt. Ltd. New Delhi. P681, P742-750. M.L Jhingan, (2009). Managerial Economics, Monetary Policy. Vrinda Publications Pvt. Ltd. New Delhi. P681, P717-720. Paul A. Samuelson, (2002). Economics, Central Banking and Monetary Policy. Massachusetts Institute of Technology. Tata McGraw-Hill Publishing Company. P512. Paul A. Samuelson, (2002). Economics, Massachusetts Institute of Technology, Tata McGraw-Hill Publishing Company. P414-421. Paul A. Samuelson, (2002). Economics, Massachusetts Institute of Technology. Tata McGraw-Hill Publishing Co. P459-469. Paul A. Samuelson, (2002). Economics, Measuring Economic Activity, Massachusetts Institute of Technology, Tata McGraw-Hill Publishing Company. P434-440. Paul A. Samuelson, (2002). Economics. Massachusetts Institute of Technology. Tata McGraw-Hill Publishing Co. P420. Paul A. Samuelson, (2002). Economics. Massachusetts Institute of Technology. Tata McGraw-Hill Publishing Co. P478. Suraj B. Gupta, (2009). Monetary Economic Money and Payment System, The Demand for Money, S. Chand & Company, New Delhi. P179-184. Suraj B. Gupta, (2009). Monetary Economics, Money and Payment System, S. Chand & Company, New Delhi. P15.
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Self Assessment Answers

Chapter I
1. 2. 3. 4. 5. 6. 7. 8. 9. 10. d a a c b b d a b b
Chapter II
1. 2. 3. 4. 5. 6. 7. 8. 9. 10. a b d c b c b a b b
Chapter III
1. 2. 3. 4. 5. 6. 7. 8. 9. 10. b c a b c a a a d a
Chapter IV
1. 2. 3. 4. 5. 6. 7. 8. 9. 10. b b a a d a b c c a
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Chapter V
1. 2. 3. 4. 5. 6. 7. 8. 9. 10. a d a a d a a a d a
Chapter VI
1. 2. 3. 4. 5. 6. 7. 8. 9. 10. a a b c a a d a b b
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Changes in Scarce Resources (Land, Labor, Capital)
Fluctuation in out put and Income
Nation output
Decides GDP, GNP, NNP, NDP
Depends
Money Supply & Consumption Investment Affects
Monetary Policy
Fiscal Policy
Cause Inflation
Fluctuation in Money Supply

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