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Macroeconomic MixedBag


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Macroeconomic basic concepts like Inflation, BOP, Monetary policy, Fiscal Policy and Exchange rate. Remade this presentation for the Macroeconomics class in Prezi which looks better, but this ones fine too.

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Macroeconomic MixedBag

  2. 2. 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. TVS, New Delhi 11/26/2013
  3. 3. 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. TVS, New Delhi 11/26/2013
  4. 4. Types of Monetary Policies Monetary Policy Target Market Variable Interest rate on overnight Inflation Targeting debt Interest rate on overnight Price Level Targeting debt Monetary The growth in money Aggregates supply The spot price of the Fixed Exchange Rate currency Gold Standard The spot price of gold Mixed Policy Usually interest rates Long Term Objective A given rate of change in the CPI A specific CPI number A given rate of change in the CPI The spot price of the currency Low inflation as measured by the gold price Usually unemployment + CPI change TVS, New Delhi 11/26/2013
  5. 5. Tools Of Indian Monetary Policy  Open Market Operations  Statutory Liquidity Ratio  Cash Reserve Ration  Repo Rate and Reverse Repo Rate  Bank Rate TVS, New Delhi 11/26/2013
  6. 6. 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 TVS, New Delhi 11/26/2013
  7. 7. 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. TVS, New Delhi 11/26/2013
  8. 8. 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; TVS, New Delhi 11/26/2013
  9. 9. 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. TVS, New Delhi 11/26/2013
  10. 10. 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. TVS, New Delhi 11/26/2013
  11. 11. 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. TVS, New Delhi 11/26/2013
  12. 12. 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 TVS, New Delhi 11/26/2013
  13. 13. 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". TVS, New Delhi 11/26/2013
  14. 14. 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. TVS, New Delhi 11/26/2013
  15. 15. 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 TVS, New Delhi 11/26/2013
  16. 16. 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 governmentowned 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; TVS, New Delhi 11/26/2013
  17. 17. 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 TVS, New Delhi 11/26/2013
  18. 18. Thank you TVS, New Delhi 11/26/2013