MACROECONOMIC MIXEDBAG

TV,SHREEHARSHA

A Few Macroeconomic Concepts

TVS, New Delhi

Introduction

Macroeconomics is a branch of economics dealing with the performance, structure, behavior, and decision-making of an economy as a whole, rather than individual markets. This includes national, regional, and global economies

This Presentation covers the topics of Monetary and Fiscal Policy, Inflation, BOP, and Exchange rate.

The objective of this presentation is to understand the basics without getting into details and complications.

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Monetary Policy Monetary policy is the process by which the

monetary authority of a country controls the supply of money, often targeting a rate of interest for the purpose of promoting economic growth and stability.

Monetary authority is the central bank of a country; RBI is the central bank in India.

Monetary Policy can be Expansionary or Contractionary based on the rate with which it increases the supply of Money.

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Types of Monetary PoliciesMonetary

PolicyTarget Market

Variable Long Term ObjectiveInflation Targeting

Interest rate on overnight debt

A given rate of change in the CPI

Price Level Targeting

Interest rate on overnight debt A specific CPI number

Monetary Aggregates

The growth in money supply

A given rate of change in the CPI

Fixed Exchange Rate

The spot price of the currency

The spot price of the currency

Gold Standard The spot price of gold

Low inflation as measured by the gold price

Mixed Policy Usually interest ratesUsually unemployment + CPI change

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Tools Of Indian Monetary Policy Open Market Operations Statutory Liquidity Ratio Cash Reserve Ration Repo Rate and Reverse

Repo Rate Bank Rate

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Fiscal Policy

Fiscal Policy is the use of government revenue collection and expenditure to influence the economy.

The Ministry of Finance formulates the Fiscal Policy in India.

Stances of Fiscal Policy Neutral fiscal policy Expansionary fiscal policy Contractionary fiscal policy

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Effects Of Fiscal Policy

Governments use fiscal policy to influence the level of aggregate demand in the economy.

A Fiscal Deficit is created when the government benefits received by Public exceed the taxes paid.

Keynesian economics suggests that increasing government spending and decreasing tax rates are the best ways to stimulate aggregate demand.

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Monetary Policy Vs Fiscal Policy

Monetary Policy Fiscal Policy

Fiscal policy is the use of government expenditure and revenue collection to influence the economy.

Monetary policy is the process by which the monetary authority of a country controls the supply of money

Manipulating the level of aggregate demand in the economy to achieve economic objectives of price stability, full employment, and economic growth.

Manipulating the supply of money to influence outcomes like economic growth, inflation, exchange rates with other currencies and unemployment

Government is the Policymaker Central Bank is the Policymaker

Tools : Taxes, Govt Expenditure Tools: CRR,SLR; currency peg; discount window; quantitative easing; open market operations;

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Inflation Inflation is defined as a sustained increase in

the general level of prices for goods and services.

There are several variations on inflation: Deflation is when the general level of prices is

falling. This is the opposite of inflation. Hyperinflation is unusually rapid inflation. In

extreme cases, this can lead to the breakdown of a nation's monetary system.

Stagflation is the combination of high unemployment and economic stagnation with inflation.

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Causes of Inflation

Demand-Pull Inflation - This theory can be summarized as "too much money chasing too few goods". In other words, if demand is growing faster than supply, prices will increase. This usually occurs in growing economies.

Cost-Push Inflation - When companies' costs go up, they need to increase prices to maintain their profit margins. Increased costs can include things such as wages, taxes, or increased costs of imports.

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IllEffects of Inflation

Creditors lose and Debtors gain if the lender does not anticipate inflation correctly.

Uncertainty about what will happen next makes corporations and consumers less likely to spend. This hurts economic output in the long run.

People living off a fixed-income, such as retirees, see a decline in their purchasing power and, consequently, their standard of living.

If the inflation rate is greater than that of other countries, domestic products become less competitive.

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Measuring and Fighting Inflation Consumer Price Index (CPI) - A measure of

price changes in consumer goods and services such as gasoline, food, clothing and automobiles.

Producer Price Indexes (PPI) - A family of indexes that measure the average change over time in selling prices by domestic producers of goods and services.

Inflation can be controlled by: Monetary Policy change Fiscal Policy Change Fixed Exchange Rates

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Exchange Rate Exchange rate between two currencies is the

rate at which one currency will be exchanged for another.

The buying rate is the rate at which money dealers will buy foreign currency, and the selling rate is the rate at which they will sell the currency.

The quotation EUR/USD 1.2500 means that 1 Euro is exchanged for 1.2500 US dollars. Here, EUR is called the "base currency" or "unit currency", while USD is called the "term currency" or "price currency".

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Exchange Rate Regime An exchange-rate regime is the way an

authority manages its currency in relation to other currencies and the foreign exchange market.

Types: Floating exchange rate, where the market

dictates movements in the exchange rate. Pegged float, where a central bank keeps the

rate from deviating too far from a target band or value.

fixed exchange rate, which ties the currency to another currency.

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Balance Of Payments

BoP is a statement that summarizes an economy’s transactions with the rest of the world for a specified time period.

All trades conducted by both the private and public sectors are accounted for in the BOP in order to determine how much money is going in and out of a country.

If a country has received money, this is known as a credit, and if a country has paid or given money, the transaction is counted as a debit.

Theoretically, BOP should be zero, meaning credits and debits should balance.

Thus, the BOP can tell the observer if a country has a deficit or a surplus

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Divisions of BOP The current account is used to mark the inflow and

outflow of goods and services into a country. Earnings on investments, both public and private, are also put into the current account.

The capital account is where all international capital transfers are recorded. This refers to the acquisition or disposal of non-financial assets and non-produced assets.

In the financial account, international monetary flows related to investment in business, real estate, bonds and stocks are documented. Also included are government-owned assets such as foreign reserves, gold, private assets held abroad and direct foreign investment.

The current account should be balanced against the combined-capital and financial accounts;

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Conclusion

Macroeconomics is a diverse field of study with various concepts that are both interrelated and independent.

This presentation has dealt with a few macroeconomic concepts without going into depth.

More information in the class or goto www.investopedia.com

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Thank you

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