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Eco 7th Lecture[1]


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Eco 7th Lecture[1]

  1. 1. Economics Analysis for Managerial Applications -Taught By: Ms.Dimple, Assistant Professor FMS Department, NIFT Delhi
  2. 2. Macroeconomic Policy: Meaning & Scope <ul><li>Macroeconomic Policy can be defined as a programme of action undertaken to control, regulate and manipulate macroeconomic variables to achieve macroeconomic goals of the society. It is in fact an instrument of policing the economy to achieve certain economic goals. </li></ul><ul><li>The scope of the policy includes all major macroeconomic variables. </li></ul><ul><li>Macroeconomic variables include both real and monetary variables. </li></ul><ul><li>Real variables include: </li></ul><ul><li>1.GNP gross national product. </li></ul><ul><li>2.Total employment. </li></ul><ul><li>3.Aggregate expenditure. </li></ul><ul><li>4.Savings & investment. </li></ul><ul><li>5.Government expenditure. </li></ul><ul><li>6.Tax & non-tax revenue. </li></ul><ul><li>7.Exports & imports. </li></ul><ul><li>8.Balance of payments. </li></ul>
  3. 3. <ul><li>Monetary variables include: </li></ul><ul><li>1.Supply of money.RBI supplier. </li></ul><ul><li>2.Demand for money. </li></ul><ul><li>3.Supply of credit. Lending of commercial BANKS. </li></ul><ul><li>4.Bank deposits. </li></ul><ul><li>5.Interest rate. </li></ul><ul><li>Two kinds of tools are used to control macro-variables: </li></ul><ul><li>1.Monetary measures-Interest rate,money supply. </li></ul><ul><li>2.Fiscal measures-tax and government expenditure. </li></ul>
  4. 4. Objectives of macroeconomic policies <ul><li>Economic growth </li></ul><ul><li>High rate of employment </li></ul><ul><li>Stabilization of Prices, Output & Employment </li></ul><ul><li>Economic equity </li></ul><ul><li>Stabilizing balance of payments </li></ul>
  5. 5. Objectives of the Indian macroeconomic policy <ul><li>Achieving a growth rate of 5-6% per annum </li></ul><ul><li>Creating job opportunities for unemployed & underemployed </li></ul><ul><li>Removing economic disparity </li></ul><ul><li>Eradication of poverty </li></ul><ul><li>Controlling inflation and price stabilization </li></ul><ul><li>Preventing balance of payment imbalances </li></ul>
  6. 6. Monetary Policy <ul><li>Monetary policy is essentially a programme undertaken by the monetary authorities, generally the central bank, to control and regulate the supply of money with the public and the flow of credit with a view to achieving predetermined macroeconomic goals. </li></ul><ul><li>Scope of monetary policy depends upon: </li></ul><ul><li>1.The level of monetization of the economy </li></ul><ul><li>2.The level of development of the capital market </li></ul><ul><li>In a fully monetized economy, the scope of monetary policy encompasses the entire economic activities. </li></ul><ul><li>A developed capital market is one which has the following features: </li></ul><ul><li>1.Large no. of financially strong commercial banks, financial institutions, credit organizations, and short term bill market. </li></ul><ul><li>2.A major part of financial transactions are routed through the capital markets </li></ul><ul><li>3.The working of capital sub-markets is interlinked and interdependent </li></ul><ul><li>4.Commodity sector is highly sensitive to the changes in the capital market </li></ul>
  7. 7. Instruments of monetary policy <ul><li>The nuts and bolts of monetary policy are classified under two categories: </li></ul><ul><li>1.Quantitative measures. </li></ul><ul><li>2.Qualitative or selective credit controls. </li></ul>
  8. 8. Quantitative measures of Monetary control <ul><li>Open market operations.dealswith govt dated security. </li></ul><ul><li>Discount rate or bank rate.rate at which RBI lends money to commercial banks. </li></ul><ul><li>Cash reserve ration (CRR)-7.5% </li></ul><ul><li>SATUTORY LIQUIDITY RATIO,25% </li></ul>
  9. 9. Qualitative or selective credit controls <ul><li>Credit rationing-priority lending. </li></ul><ul><li>Change in lending margins </li></ul><ul><li>Moral Persuasion. </li></ul><ul><li>Direct controls. </li></ul>
  10. 10. Transmission mechanism of monetary policy <ul><li>Portfolio adjustment </li></ul><ul><li>The keynesian approach </li></ul><ul><li>The Monetarist approach </li></ul>
  11. 11. Limitations & Effectiveness of Monetary Policy <ul><li>The effectiveness of monetary policy, in practice, depends on the following limiting factors: </li></ul><ul><li>1.The Time Lag </li></ul><ul><li>2.Problems in Forecasting </li></ul><ul><li>3.Non-Banking Financial Intermediaries </li></ul><ul><li>4.Underdeveloped Money & Capital Markets </li></ul>
  12. 12. Fiscal Policy <ul><li>Fiscal policy is the govt. programme of making discretionary changes in the pattern and level of its expenditure, taxation and borrowings in order to achieve intended economic growth, employment, income equality, and stabilization of the economy on a growth path. </li></ul>
  13. 13. Scope of Fiscal Policy <ul><li>By the scope of fiscal policy, we mean the number of fiscal instruments and target variables. </li></ul><ul><li>Fiscal Instruments are variables that govt. can change and maneuver at its own discretion: They include: </li></ul><ul><li>1.Budgetary surplus & deficit </li></ul><ul><li>2.Govt. expenditure </li></ul><ul><li>3.Taxation-direct & indirect </li></ul><ul><li>4.Public Debt </li></ul><ul><li>5.Deficit financing </li></ul><ul><li>Target variables are the macro variables that are intended to be changed to achieve the intended results. </li></ul><ul><li>Fiscal Policy is implemented through fiscal instruments also called ‘Fiscal Handles’ and ‘Fiscal Levers’. The changes made in fiscal tools work through their linkage to the target variables </li></ul>
  14. 14. <ul><li>The target variables of fiscal policy are: </li></ul><ul><li>1.Private disposable incomes. </li></ul><ul><li>2.Private consumption expenditure </li></ul><ul><li>3.Private savings & investment </li></ul><ul><li>4.Exports & imports </li></ul><ul><li>5.Level & structure of prices </li></ul><ul><li>The major Fiscal instruments include the following measures: </li></ul><ul><li>1.Budgetary Balance policy </li></ul><ul><li>2.Govt. Expenditure </li></ul><ul><li>3.Taxation </li></ul><ul><li>4.Public borrowings </li></ul>
  15. 15. Kinds of Fiscal Policy <ul><li>Fiscal Policy actions are classified under the following categories: </li></ul><ul><li>1.Automatic Stabilization Fiscal Policy </li></ul><ul><li>2.Compensatory Fiscal Policy </li></ul><ul><li>3.Discretionary Fiscal Policy </li></ul>
  16. 16. Limitations of Fiscal Policy <ul><li>Formulation of an appropriate fiscal policy requires reliable forecasting of the target variables. But no one has yet discovered a foolproof method of economic forecasting </li></ul><ul><li>The overall effect of changes in the policy instruments is determined by the rate of dynamic multiplier </li></ul><ul><li>Decision and execution lags in case of discretionary fiscal policy makes both working and efficacy of fiscal policy shrouded with uncertainty </li></ul><ul><li>The working and effectiveness of fiscal policies in underdeveloped countries is severely limited by low levels of income, small proportion of population in taxable income groups, the existence of a large monetized sector and all pervasive corruption & inefficiency in administration </li></ul><ul><li>In countries excessively pendent of fiscal policy, the govt. is forced to have recourse to internal and external borrowings and deficit financings </li></ul>
  17. 17. THANK YOU