Hi, in this video we'll try and understand the Macroeconomics.

Macroeconomics deals with Gross Domestic Product or GDP, or Gross National Product
(GNP).
It deals with aggregate price level, rate of change in price of goods and
services,
also referred to as inflation.
How interest rates are determined, how exchange rates are determined, and how the
Reserve Bank of India
changes the money in circulation, the economy, and what factors determine the
investment by companies or firms.
So the Gross Domestic Product or GDP is the value of all final goods and services
produced in the country,
because we can't measure different quantities of output measured in different
units.
We have to convert them into their monetary value. Say, you can't add litres of
milk with tons of steel.
So you have to convert the different components of the output into their monetary
value using the prices.
So we will multiply the values output by the prices of those goods in the given
year
and derive the Gross Domestic Product in a particular year.
The Gross Domestic Product will change due to changes in output of goods and
services
and also due to changes in prices of goods and services.
So, that's why a distinction is made between real GDP and nominal GDP.
The nominal GDP accounts for the current output valued at current prices.
Whereas, the real GDP accounts for current output valued at some base years prices,
in which case
we change in real GDP is the change in quantity of output of goods and services in
the economy.
How does one try and increase the rate of GDP growth?
That is, you know, how can the government and the Reserve Bank of India which
implement the fiscal and monetary policies,
try and increase the rate of GDP growth and in the process increase the employment.
There are two types of policies that are implemented. One is the fiscal policy, and
the other is the monetary policy.
Fiscal policy is implemented by Government of India and it relates to changes in
taxes,
that is personal income taxes and corporate taxes and it also relates to changes in
government expenditure.
So, changes in these policies will have an impact on the GDP.
If the government implements what is called an expansionary fiscal policy, it will
result in higher GDP and hence employment.
Whereas, if the government implements a contractionary fiscal policy, it will lead
to lower GDP and hence lower employment.
What is an expansionary fiscal policy?
Lowering the taxes, increasing the government expenditure is an example of an
expansionary fiscal policy,
because lower taxes and higher government expenditure will lead to higher GDP and
employment.
Whereas, increasing the tax rate and decreasing government expenditure
would lead to decrease in GDP and hence employment. And hence, increase in taxes or
decrease in
government expenditure or both would be an example of a contractionary fiscal
policy.
Let's understand the monetary policy.
The Reserve Bank of India implements the monetary policy in India. It is also
referred to as the Central Bank of the country.
It's different from the Central Bank of India versus the scheduled commercial bank.
So the Central banks in different countries are known by different names.
For example, the central bank of the U.S. is called the Federal Reserve.
Similarly, the central bank in this country is called the Reserve Bank of India.
The objectives of monetary policy implement by the Reserve Bank of India are to
maintain
price stability, exchange rate stability and to ensure adequate credit flow to
different sectors of the economy.
So, Reserve Bank of India will try and the influence the money supply in the
economy
to ensure that the prices are stable and the exchange rates are stable and also to
ensure
that adequate credit goes to different sectors of the economy.
So, in implementing this monetary policy, the Reserve Bank of India will also try
and
bring about changes in interest rates and money in circulation in the economy.
And these are changes that are brought about by RBI will have an impact on prices
of goods and services
and also on investment by companies or firms because changes in interest rates will
influence
the investment spending by companies or firms.
The Reserve Bank of India can influence the money in circulation, the economy, by
changing
what is called the reserve ratio or cash reserve ratio.
The cash reserve ratio is nothing but the percentage of deposits or what is called
NDTL that
scheduled commercial banks have to hold with the Reserve Bank of India as reserves.
So for example, if the CRR is 4%, 4% of every 100 rupees of deposit that we keep
with the bank
should be held with the Reserve Bank of India as liquid cash or reserves.
So that means these, this reserve ration requirement will take away from the
deposit days of the banks and their ability to lend.
And the Reserve Bank can also change what is called the repo rate.
Repo rate is the short term rate at which the banks borrow and lend among
themselves
for short time periods ranging from overnight up to 15 days or month when they
experience
deficit in their cash flows or surplus in their cash flows, and they can also
borrow at this repo rate
from the Reserve Bank of India to tide over their, you know, tide over the
difficulty in their cash positions.
So, if the Reserve Bank of India increases the repo rate, then they will have to
pay
a higher cost to borrow from the Reserve Bank or from other banks that has surplus
cash.
So, if the Reserve Bank increase the repo rate, the cost of falling short of cash
will increase
for the banks and they will try and hold higher results with the Reserve Bank of
India.
And the process their ability to lend will decrease.
The Reserve Bank can also resort what is called open market operations that is the
open market
purchase or sale of government securities.
When the Reserve bank of India sales government securities, it is actually sucking
the liquidity from the system.
When it buys the government securities, then it is injecting liquidity into the
system.
So, it can change or influence the money in circulation economy through these
different means.
There is an inverse relation between money supply and interest rates.
That means when the money supply increases the interest rates will decrease, and
when money supply decreases interest rates will increase.
The money supply will increase and interest rates will decrease if the RBI or
the Reserve Bank of India implements an expansionary monetary policy.
What is an expansionary monetary policy?
The Reserve Bank can decrease the repo rate, in which case, you know, the banks
will hold less excess reserves.
The Reserve Bank can decrease the cash reserve ratio requirement of banks and again
that would
lead to increase in money supply in the economy.
The money supply will decrease and interest rate will increase if the Reserve Bank
of India
implements what is called a contractionary monetary policy.
So the Reserve Bank can increase the repo rate, it can increase the cash reserve
ratio
to ensure that the banks hold higher excess reserves and in the process decreasing
the money in circulation in the economy.
So the primary objective of price stability will determine the monetary policy
stance
of the Reserve Bank of India more often than not.
So, whether the Reserve Bank will try and increase the money in circulation or
decrease the money in circulation
will be determined by the rate of change or increase in prices during a particular
period.
Higher the money in circulation, higher would be the expected inflation.
Lower the money in circulation, lower would be the expected the inflation.
So, the Reserve Bank will be guided by its primary objective of maintaining price
stability while
implementing the monetary policy.
So in this session, we have covered what macroeconomics is all about,
and what are the fiscal policy parameters of variable, and how the Reserve Bank of
India implements the
monetary policy in trying to ensure price stability and exchange rate stability and
in its efforts
to ensure adequate flow of credit to different sectors of the economy.
So I hope, we now understand what macroeconomics deals with and what expansionary
fiscal and
monetary policies are, and what contractionary fiscal and monetary policies are.
Thank you.