PPT ON INFLATION, INTEREST RATE, EMPLOYMENT, SAVING AND INVESTMENT, MONETARY AND FISCAL SYSTEMS, AND POLICIES.

1. TOPICS COVERED : INFLATION, INTREST
RATE, EMPLOYEMENT,SAVING AND INVESTMENT , MONITARY
AND FISCAL SYSTEMS AND POLICIES.

2. ▪ In economics, inflation is a sustained increase in
the general price level of goods and services in an
economy over a period of time.
▪ When the general price level rises, each unit of
currency buys fewer goods and services;
consequently, inflation reflects a reduction in
the purchasing power per unit of money – a loss of real
value in the medium of exchange and unit of account
within the economy.
▪ The opposite of inflation is deflation, a sustained
decrease in the general price level of goods and
services.
▪ The common measure of inflation is the inflation rate,
the annualized percentage change in a general price
index, usually the consumer price index, over time.

3. ▪ Inflation affects economies in various positive and negative
ways.
▪ The negative effects of inflation include an increase in
the opportunity cost of holding money,uncertainty over future
inflation which may discourage investment and savings,and if
inflation were rapid enough,shortages of goods as consumers
begin hoarding out of concern that prices will increase in the
future.
▪ Positive effects include reducing unemployment due
to nominal wage rigidity, allowing the central bank more
leeway in carrying out monetary policy,encouraging loans
and investment instead of money hoarding,and avoiding the
inefficiencies associated with deflation.

4. ▪ Causes : Historically, a great deal of economic literature was
concerned with the question of what causes inflation and what
effect it has. There were different schools of thought as to the causes
of inflation. Most can be divided into two broad areas: quality
theories of inflation and quantity theories of inflation.
▪ Historically, rapid increases in the quantity of money or in the
overall money supply have occurred in many different societies
throughout history, changing with different forms of money used.
▪ For instance, when gold was used as currency, the government
could collect gold coins, melt them down, mix them with other
metals such as silver, copper, or lead, and reissue them at the
same nominal value.
▪ By diluting the gold with other metals, the government could issue
more coins without increasing the amount of gold used to make
them.
▪ When the cost of each coin is lowered in this way, the government
profits from an increase in seigniorage.

5. ▪ An interest rate is the amount of interest due per
period, as a proportion of the amount lent,
deposited or borrowed (called the principal sum).
▪ The total interest on an amount lent or borrowed
depends on the principal sum, the interest rate, the
compounding frequency,and the length of time over
which it is lent, deposited or borrowed.
▪ It is the rate a bank or other lender charges to
borrow its money,or the rate a bank pays its savers
for keeping money in an account
▪ The annual interest rate is the rate over a period of
one year.Other interest rates apply over different
periods, such as a month or a day,but they are
usually annualised.
Interest Rate2000-2020 Data

6. ▪ Influencing factors
▪ Interest rates vary according to:
▪ the government's directives to the central bank to
accomplish the government's goals
▪ the currency of the principal sum lent or borrowed
▪ the term to maturity of the investment
▪ the perceived default probability of the borrower
▪ supply and demand in the market
▪ the amount of collateral
▪ special features like call provisions
▪ reserve requirements
▪ compensating balance
▪ as well as other factors.
▪ Simple interest = principal x interest rate x time
India Interest Rate Chart

7. ▪ Employment is a relationship between two parties, usually
based on a contract where work is paid for, where one party,
which may be a corporation, for profit, not-for-profit
organization, co-operative or other entity is the employer and
the other is the employee.
▪ Full employment is an economic situation in which all available
labor resources are being used in the most efficient way
possible.
▪ Full employment embodies the highest amount of skilled and
unskilled labor that can be employed within an economy at any
given time.
▪ An economy with full employment might still
have underemployment where part-time workers cannot find
jobs appropriate to their skill level.
▪ The concept of full employment of labor corresponds to the
concept of potential output or potential real GDP and the long
run aggregate supply (LRAS) curve.

8. ▪ Types of Full Employment
▪ First,the natural rate of unemployment represents
only the amount of unemployment due to structural
and frictional factors in labor markets.
▪ Second, the non-accelerating inflation rate of
unemployment (NAIRU) represents the rate of
unemployment that is consistent with a low,stable rate
of price inflation.
▪ It is not full employment but is the closest the
economy can be to full employment without excessive
upward pressure on prices from increasing wages.
▪ Types of employment
▪ Full-time and part-time employees.
▪ Casual employees.
▪ Fixed term and contract.
▪ Apprentices and trainees.
▪ Commission and piece rate employees.

9. ▪ SAVINGS :
▪ The level of saving in the economy depends on a number of
factors.
▪ A higher real interest rate will give a greater return on saving
as banks offer more favourable rates.
▪ Poor returns on risky forms of saving, e.g. stocks and bonds,
make it more advantageous to hold money savings (in
contention between Keynesian and Monetarist views here,
mostly because of differences in definitions).
▪ Poor expectation for future economic growth, increase
households' savings as a precaution for a grim future.
▪ More disposable income after fixed expenditures (such as
mortgage, heating bill, basic goods purchases) have been
made (in contention between Keynesian and Monetarist views
here, mostly because of differences in definitions).

10. ▪ INVESTMENT :
▪ Investment is made into capital (ie. plant and machinery, also
'human capital' - training and education), with intent to
increase productivity, efficiency and output of goods and
services
▪ In national accounting terms, stocks, bonds, mutual funds,
and other items whose value is risky, are NOT investments.
They fall into the savings account, not the investment
account.
▪ The 2 Forms of Investment
▪ a) voluntary
▪ normal investment → plant equipment etc.
▪ planned increases in inventory.
▪ b) involuntary
▪ unplanned increases in inventories, output not consumed.

11. ▪ Levels of savings are influenced by
▪ Interest rates – higher interest rates make it more attractive to save
▪ Confidence – low confidence can encourage households to save more
▪ Levels of investment are affected by
▪ Interest rates – higher interest rates make investment more expensive (cost of borrowing
goes up)
▪ Confidence – if firms are confident, they are more willing to invest.
▪ Economic growth – An increase in the rate of economic growth will encourage firms to
invest to meet future demand.
▪ If there is an increase in savings, then banks can lend more to firms to finance investment
projects. In a simple economic model, we can say the level of saving will equal the level of
investment.

12. ▪ Monetary Policy
▪ Monetary policy involves influencing the supply and demand for
money through interest rates and other monetary tools.
▪ Monetary policy is usually conducted by the Central Bank, e.g. UK
– Bank of England, US – Federal Reserve.
▪ The target of Monetary policy is to achieve low inflation (and
usually promote economic growth)
▪ The main tool of monetary policy is changing interest rates. For
example, if the Central Bank feel the economy is growing too
quickly and inflation is increasing, then they will increase interest
rates to reduce demand in the economy.
▪ In some circumstances, Central Banks may use other tools than just
interest rates. For example, in the great recession 2008-12, Central
Banks in UK and US pursued quantitative easing. This involved
increasing the money supply to increase demand.
UK interest rates cut in 2009 due to the
global recession.

13. ▪ Fiscal Policy
▪ Fiscal policy relates to the impact of government
spending and tax on aggregate demand and the
economy.
▪ Expansionary fiscal policy is an attempt to increase
aggregate demand and will involve higher government
spending and lower taxes.
▪ Expansionary fiscal policy will lead to a larger budget
deficit.
▪ Deflationary fiscal policy is an attempt to reduce
aggregate demand and will involve lower spending and
higher taxes.
▪ This deflationary fiscal policy will help reduce a budget
deficit.
In 2009/10, the UK pursued expansionary fiscal
policy – cutting VAT. This led to a rise in
government borrowing.

14. Both fiscal and monetary policy
are an attempt to reduce
economic fluctua and smooth out
the economic cycle.
The main difference is that
Monetary policy uses interest
rates set by the Central Bank.
Fiscal policy involves changing
government spending and taxes
to influence the level of
aggregate demand

15. SUBMITTED BY :
T.NOMESHWARI
17041AA109
SEMESTER – 6
SECTION - C