M.L. Jhingan: Macroeconomic Theory

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1601 Part-I Introduction
160101 CHAPTER 1 The Nature and Scope of Macroeconomics
19010101 Scope and Importance of Macroeconomics
1901010101(1) To Understand the Working of the Economy.
1901010102(2) In Economic Policies.
190101010321 354: 20150514@ hgx:the use of macroecomomic study in the solution of certain complex economic problems.
2101010104(3) For Understanding the Behaviour of Individual Units.
21010102 Limitations of Macroeconomics
2101010201(1) Fallacy of Composition.
2201010202(2) To Regard the Aggregates as Homogeneous.
2201010203(3) Aggregate Variables may not be Important Necessarily.
2201010204(4) Indiscriminate Use of Macroeconomics Misleading.
2201010205(5) Statistical and Conceptual Difficulties.
23010103 Difference Between Microeconomics and Macroeconomics
24010104 Dependence of Microeconomic Theory on Macroeconomics
24010105 Dependence of Macroeconomics on Microeconomic Theory
25010106 Macro Statics, Macro Dynamics And Comparative Statics
26010107 Macro Dynamics
2010108 economic dynamics studies the path from one equilibrium position to another
29010109 Comparative Statics
2010110 F.Oppenheimer in 1916. Schumpeter described it as "an evolutionary process by a succession of static models."
31010111 Transition from Microeconomics to Macroeconomics
34010112 Stock and Flow Concepts
3501011201In Microeconomics
3501011202In Macroeconomics
3702 Part-II National Income
370201 CHAPTER 2 National Income : Meaning and Measurement
37020101 Definitions of National Income
3702010101The Marshallian Definition
3802010102The Pigouvian Definition
3902010103Fisher's Definition
4002010104Modern Definitions
41020102 Concepts of National Income
4102010201(A) Gross Domestic Product (GDP)
410201020242 733: 20150514@ hgx:"the market value of the output of final goods and services produced in the domestic territory of a country during an accounting year."
4202010203(B) GDP at Factor Cost
4302010204(C) Net Domestic Product (NDP)
4302010205(D) Nominal and Real GDP
4402010206(E) GDP Deflator
4402010207(F) Gross National Product (GNP)
4602010208Three Approaches to GNP
5202010209(G) GNP at Market Prices
5302010210(H) GNP at Factor Cost
5402010212(I) Net National Product (NNP)
5402010213(J) NNP at Market Prices
5402010214(K) NNP at Factor Cost
5402010215(L) Domestic Income
5502010216(M) Private Income
5602010217(N) Personal Income
5702010218(O) Disposable Income
5702010219(P) Real Income
5802010220(Q) Per Capita Income
58020103 Methods of Measuring National Income
5802010301(1) Product Method.
5902010302(2) Income Method.
5902010303(3) Expenditure Method.
5902010304(4) Value Added Method.
60020104 Difficulties or Limitations in Measuring National Income
6002010401(A) Problems in Income Method
6102010402(B) Problems in Product Method
6302010403(C) Problems in Expenditure Method
65020105 Importance of National Income Analysis
65020105011. For the Economy.
65020105022. National Policies.
65020105033. Economic Planning.
65020105044. Economic Models.
65020105055. Research.
66020105066. Per Capita Income.
66020105077. Distribution of Income.
66020106 Inter-Relationships Among Different Concepts of National Income
68020107 Some Solved Problems
72020108 b,0150515
730202 CHAPTER 3 Economic Welfare and National Income
74020201 Relation between Economic Welfare and National Income
7402020101Change in the Size of National Income
77020202 National Income as a Measure of Economic Welfare
810203 CHAPTER 4 National Income Accounting
81020301 Social Accounting
82020302 Components of Social Accounting
8202030201(1) Production Account.
8302030202(2) Consumption Account.
8402030203(3) Government Account.
8502030204(4) Capital Account.
8502030205(5) Foreign Account.
8702030206Presentation of Social Accounts
8802030207Importance of Social Accounting
88020303 The uses of social accounting are as follows
8902030301(1) In Classifying Transactions.
8902030302(2) In Understanding Economic Structure.
8902030303(3) In Understanding Different Sectors and Flows.
8902030304(4) In Clarifying Relations between Concepts.
8902030305(5) In Guiding the Investigator.
9002030306(10) In Estimating Effects of Government Policies.
9102030307(13) Basis of Economic Models.
91020304 Difficulties of Social Accounting
91020304011. Imputations.
92020305 Input-Output Table
93020306 How to Find out GNP, GNI and GNE from the Input-Output Table?
94020307 Input Co-efficient or Technical Co-efficient
96020308 Limitations of Input-Output Accounting Analysis
96020308011. Constancy of Input Coefficient Assumption Unrealistic.
97020308022. Factor Substitution Possible.
97020308033. Rigid Model.
97020308044. Restrictive Model.
97020308055. Difficulty in Final Demand.
98020308066. Quantity of Inputs not Constant.
98020308077. Solution of Equations Difficult. The
98020309 Importance
98020310 Flow of Funds Accounts
103020311 Difference between flow of funds Accounts and National Income Accounts
103020312 Balance of Payments Accounts
10302031201Structure and Classification
107020313 Is Balance of Payments always in Equilibrium?*
110020315 Measuring Deficit or Surplus in Balance of Payments
1130204 CHAPTER 5 The Circular Flow of Income
113020401 Circular Flow in a Two Sector Economy
11402040101Circular Flow with Saving and Investment Added
114020402 Circular Flow in a Three-sector Closed Economy
116020403 Adding Foreign Sector : Circular Flow in a Four-sector Open Economy
7020404 exports of an economy must balance its imports. This is achieved by the foreign trade policies adopted by the economy.
118020405 Importance of the Circular Flow
12103 Part-III Macroeconomic Theory
1210301 CHAPTER 6 The Classical Theory of Employment
121030101 The Classical Theory of Employment
121030102 122 2180: 20150515@ hgx:The classical economists believed in the existence of full employment in the economy.
12303010201Determination of output and Employment
12303010202Labour Market Equilibrium
12503010203Wage Price Flexibility
12703010204Goods Market Equilibrium
12703010205Money Market Equilibrium
129030103 Complete Classical Model – A Summary
131030104 Keynes's Criticism of Classical Theory
131030105 132 2355: 20150515@ hgx:General Theory. He attacked the classical theory on the following counts:
1350302 CHAPTER 7 Say's Law of Market
80303 the economy will automatically tend toward full employment.
138030301 Propositions and Implications of the Law
138030301011. Full Employment in the Economy.
138030301024. Laissez-faire Policy.
139030302 Criticisms of Say's Law
139030302011. Supply does not Create its Demand.
demand does not increase as much as production increases.
140030302027. Equality through Income.
1410304 CHAPTER 8 The Principle of Effective Demand : Aggregate Demand and Aggregate Supply
142030401 Effective Demand
14203040101Aggregate Demand Price
14303040102Aggregate Supply Price
14503040103Determination of Effective Demand
148030402 Importance of Effective Demand
1510305 CHAPTER 9 The Consumption Function
151030501 Meaning of Consumption Function
153030502 Properties or Technical Attributes of the Consumption Function
15503050201Significance of MPC
156030503 Keynes's Psychological Law of Consumption
15803050301Its Assumptions
160030504 Implications of Keynes's Law (or Importance of the Consumption Function)
160030504011. Invalidates Say's Law.
160030504022. Need for State Intervention.
161030504033. Crucial Importance of Investment.
161030504044. Existence of Underemployment Equilibrium.
161030504055. Declining Tendency of the Marginal Efficiency of Capital.
161030504066. Danger of Permanent Over-saving or Under-investment Gap.
162030504077. Unique Nature of Income Propagation.
162030504088. Explanation of the Turning Points of the Business Cycles.
163030505 Determinants of the Consumption Function
16403050501Subjective Factors
16503050502Objective Factors
168030506 Measures to Raise the Propensity to Consume
1710306 CHAPTER 10 Theory of the Consumption Function
171030601 Keynes' Consumption Function : The Absolute Income
17303060101Empirical Studies
173030602 The Consumption Puzzle
174030603 The Drift Theory of Consumption
17703060301Its Criticisms
178030604 The Relative Income Hypothesis
177803060401The Ratchet Effect
18103060402Its Criticisms
1830307 The Permanent Income Hypothesis
188030701 Explanation of the Theory
19003070101Its Criticisms
191030702 The Life Cycle Hypothesis
19103070201Its Assumptions
19503070202Its Implications
19603070203Its Criticisms
1990308 CHAPTER 11 The Investment Function
199030801 Types of Investment
19903080101Induced Investment.
201030802 The Present Value (PV) Criterion of Investment
20203080201Accept or Reject Criterion
203030803 Determinants Of The Level Of Investment
20403080301Marginal Efficiency of Capital (MEC)
20803080302Marginal Efficiency Of Investment (MEI)
216030804 Factors Other Than The Interest Rate Affecting Inducement To Invest
21603080401(1) Element of Uncertainty.
21803080402(2) Existing Stock of Capital Goods.
21803080403(3) Level of Income.
21803080404(4) Consumer Demand.
21803080405(2) Existing Stock of Capital Goods.
21803080406(5) Liquid Assets.
21803080407(6) Inventions and Innovations.
21903080408(7) New Products.
21903080409(8) Growth of Population.
21903080410(9) State Policy.
22003080411(10) Political Climate.
2200309 CHAPTER 12 The Concept of Multiplier
220030901 The Investment Multiplier
22003090101The multiplier, according to Keynes,"establishes a precise relationship, given the propensity to consume, between aggregate employment and income and the rate of investment.
22103090102i.e., ? Y ( K ? I. In the words of Hansen, Keynes' investment multiplier is the coefficient relating to an increment of investment to an increment of income, i.e., K = ? Y/ ? I,)
22203090103Working of the Multiplier
22203090104Forward Operation
22403090105Backward Operation
22503090106Assumptions of Multiplier
22603090107Leakages of Multiplier
22803090108Criticism of Multiplier
23003090109Importance of Multiplier
232030902 The Dynamic or Period Multiplier
236030903 The Employment Multiplier
2380310 CHAPTER 13 Complex Multipliers
238031001 Government Expenditure Multiplier
239031002 Tax Multipliers
240031003 Balanced Budget Multiplier
24503100301Its Limitations
24503100302Its Critical Appraisal
2460311 CHAPTER 14 Foreign Trade Multiplier
24703110003Its Working
24803110004Its Assumptions
24903110005Diagrammatic Explanation
25003110006Foreign Repercussion or Backwash Effect
25203110007Implications of Foreign Repercussion
25303110008Criticisms of Foreign Trade Multiplier
2540312 CHAPTER 15 The Principle of Acceleration and the Super Multiplier
255031201 The Principle of Acceleration
263031202 The Super-Multiplier or the Multiplier-Accelerator Interaction
266031203 Use of Multiplier-Accelerator Interaction in Business Cycles
2690313 CHAPTER 16 Some New Theories of Investment
269031301 The Accelerator Theory of Investment
271031302 The Flexible Accelerator Theory or Lags in Investment
27303130201Koyck's Approach
27403130202Koyck transformation.
276031303 The Profits Theory of Investment
27903130301Its Criticism
280031304 Duesenberry's Accelerator Theory of Investment
283031305 The Financial Theory of Investment
283031306 284 5103: 20150515@ hgx:the cost of capital theory of investment.
28403130601Sources of Funds
28503130602Cost of Funds
28803130603Its Criticisms
289031307 Jorgensons' Neoclassical Theory of Investment
296031308 Tobin's q Theory of Investment
2990314 CHAPTER 17 The Saving Function
299031401 Meaning of Saving Function
30103140101The Average Propensity to Save (APS)
30103140102The Marginal Propensity to Save (MPS)
302031402 Determinants of Savings
30203140201(a) Will to Save
30403140202(b) Power to Save
30503140203(c) Facilities to Save
306031403 The Paradox of Thrift
3080315 CHAPTER 18 Saving and Investment Equality
308031501 The Classical View
30903150101Keynes’s Criticism of the Classical View
310031502 The Keynesian View
31003150201(1) The Accounting or Definitional Equality
31203150202(2) The Functional Equality
314031503 Other Views
31403150301The Robertsonian Approach
31503150302The Swedish Approach
3180316 CHAPTER 19 The Model of National Income Determination
318031601 Two-Sector Model
32003160101Equality of Aggregate Demand and Aggregate Supply
32103160102Equality of Saving and Investment
324031602 Three Sector Model
32403160201Government Expenditure
32703160202Effect on Saving and Investment
327031603 Four Sector Model : Income Determination In Open Economy
The analysis of the determination of income in an open economy is based on the following assumptions:
  1. 1. The domestic economy’s international trade is small relative to total world trade.
  2. 2. There is less than full employment in the economy.
  3. 3. The general price level is constant upto the full employment level.
  4. 4. Exchange rates are fixed.
  5. 5. There are no tariffs, trade and exchange restrictions.
  6. 6. Gross exports are determined by external factors.
  7. 7. Exports (X), investment (I) and goverment expenditure (G) are autonomous.
  8. 8. Consumption (C), imports (M), savings (S) and taxes (I) are each a fixed proportion of national income (Y) and their relationships with national income are linear.
3320317 CHAPTER 20 The Keynesian Theory of Income, Output and Employment: A Summary
332031701 The Keynesian Theory of Income, Output and Employment
3380318 CHAPTER 21 The Classical Vs. Keynesian Models of Income and Employment
338031801 General Theory: Evolutionary or Revolutionary
19031802 Interest and Money in 1936.
342031803 Criticisms of Keynesian Theory
3590319 CHAPTER 23 Applicability of Keynes's Theory To Underdeveloped Countries
359031901 Keynesian Assumptions and Underdeveloped Countries
361031902 The Keynesian Tools and Underdeveloped Countries
36804 Part-IV Monetary Theory
3680401 CHAPTER 24 Money
368040101 Nature and Definition of Money
369040102 Theoretical and Empirical Definitions of Money
369040103 Theoretical and Empirical Definitions of Money
377040104 Neutrality and Non-Neutrality of Money
380040105 Functions of Money
380040105011. Primary Functions
382040105022. Secondary Functions
384040105033. Contingent Functions
385040105044. Other Functions
3860402 CHAPTER 25 Changes in the Value of Money: The Quantity Theory of Money and its Variants
387040201 Fisher's Quantity Theory of Money: The Cash Transactions Approach
38904020101Assumptions of the Theory
39004020102Criticisms of the Theory
393040202 The Cambridge Equations : The Cash Balances Approach
39804020201Criticisms of the Cash Balance Approach
401040203 Transactions Approach Vs. Cash Balances Approach
401040203011. Similarities
430040203022. Dissimilarities
403040204 Superiority of Cash Balances Approach over Transactions Approach
4060403 CHAPTER 26 The Keynesian Theory of Money and Prices
407040301 Keynes's Reformulated Quantity Theory of Money
411040302 Superiority of the Keynesian Theory Over the Traditional Quantity Theory of Money
412040303 Criticisms of Keynes' Theory of Money and Prices
4130404 CHAPTER 27 Friedman's Restatement of the Quantity Theory of Money
41904040001Its Criticisms
421040401 Friedman Vs Keynes
4230405 CHAPTER 28 The Supply of Money
423040501 Definitions of Money Supply
425040502 Determinants of Money Supply
426040502011. The Required Reserve Ratio
427040502022. The Level of Bank Reserves
428040502033. Public's Desire to Hold Currency and Deposits
429040503 High-Powered Money and the Money Multiplier
434040504 Measures of Money Supply in India
436040505 Money Supply and Liquidity
436040506 437 7853: 20150515@ A liquid asset is one which is easily spendableand transferable at face value anywhere and at any time.
439040507 Derivation of Money Multipliers
4430406 CHAPTER 29 Credit Creation By Commercial Banks
445040602 The Process of Credit Creation
4480407 Limitations on The Power of Banks to Create Credit
4510408 CHAPTER 30 Central Banking: Functions And Credit Contraol
451040801 Definition of a Central Bank
451040802 453 8130: 20150515@ hgx:"The primary definition of central banking is a banking system in which a single bank has either complete control or a residuary monopoly of note issue."
452040803 Functions Of A Central Bank
452040803011. Regulator of Currency
453040803022. Banker, Fiscal Agent and Adviser to the Governement
454040803033. Custodian of Cash Reserves of Commercial Banks
454040803044. Custody and Management of Foreign Exchange Reserves
454040803055. Lender of the Last Resort
455040803066. Clearing House for Transfer and Settlement
456040803077. Controller of Credit
456040803088. Other Functions
456040804 Central Bank as The Controller of Credit
45604080401Objectives of Credit Control
45804080402Methods of Credit Control
458040804031. Bank Rate or Discount Rate Policy
460040804042. Open Market Operations
46204080405Limitations of Open Market Operations
46404080406Open Market Operations vs Bank Rate Policy
465040804073. Variable Reserve Ratio
46604080408Limitations of Variable Reserve Ratio
46804080409Variable Reserve Ratio vs Open Market Operations
47004080410Selective Credit Controls or Qualitative Methods
47004080411(A) Regulation of Margin Requirements
47204080412(B) Regulation of Consumer Credit
47304080413(C) Rationing of Credit
47404080414(D) Direct Action
47404080415(E) Moral Suasion
47504080416(F) Publicity
47504080417Limitations of Selective Credit Controls
4770409 CHAPTER 31 The Monetarist Revolution
478040901 Main Features
478040901011. Money Supply Crucial Determinant
479040901022. Transmission Mechanism of Monetary Influences
480040901033. Deteminant of Real National Income
480040901044. Stable Economy
480040901055. Important Role of Expectations
482040901074. Neglects the Role of NBFIs
483040901087. Money Supply fails to grow at a Smooth and Steady Rate
4830410 CHAPTER 32 The Demand For Money
484041001 The Classical Approach
48504100101Its Critical Evaluation
485041002 The Keynesian Approach : Liquidity Preference
48504100201The Transactions Demand for Money
49104100202The Precautionary Demand for Money
49504100203Note on Liquidity Trap
49604100204The Total Demand for Money
498041003 The Post-Keynesian Approaches
498041003011. Baumol's Inventory Theoretic Approach13
49904100302Its Assumptions Baumol's theory is based on the following assumptions:
  1. The transactions between money and bonds are transparent and occur in a steady stream.
  2. The bond market is perfect where there is easy conversion of bonds into cash and vice versa.
  3. There is a fixed cost in exchanging bonds for cash and vice versa.
  4. The holding of cash involves interest cost and non-interest costs.
  5. The interest cost (or rate of interest) is constant over the year.
  6. The non-interest costs such as brokerage fee, mailing expenses, etc. are also fixed over the year.
50304100303Its Superiority over the Classical and Keynesian Approaches
503041003042. Tobin's Portfolio Selection Model: The Risk Aversion Theory of Liquidity Preference
50904100305Its Superiority over Keynesian Theory
510041101 The Classical Theory of Interest
514041102 The Loanable Funds Theory of Interest
51704110201Its Superiority over the Classical Theory
518041103 Keynes's Liquidity Preference Theory of Interest
52704110301Its Superiority over the Loanable Funds Theory
528041104 Indeterminacy of the Classical, The Loanable Funds and The Keynesian Theories of Interest
52804110401Modern Theory of Interest
53204110402The LM Curve
53404110403Determination of the Rate of Interest
53604110404Its Criticisms
537041105 Natural and Market Rate of Interest
53704110501The Wicksell Theory
54004110502A Critical Appraisal
54204110503Fisher's Analysis
5440412 CHAPTER 34 Term Structure of Interest Rates
545041201 Factors Determining the Term Structure of Interest Rates
546041202 Theories of Term Structure of Interest Rates
54604120201The Expectations Theory
55004120203Its Criticisms
55104120204The Segmented Markets Theory
55104120205Its Assumptions
55304120206Its Policy Implications
55304120207Its Criticisms
55404120208Its Superiority Over Expectations Theory
55604120209The Substitutability Theory
55604120210The Keynesian Theory
55704120211The Liquidity or Risk Premium Theory
56004120212The Preferred Habitat Theory
5640413 CHAPTER 35 The Real Balance Effect and Pigou Effect
564041301 Patinkin's Integration of Monetary Theory and Value Theory : The Real Balance Effect
568041302 The Pigou Effect
574041303 Differences Between Pigou Effect and Real Balance Effect
5750414 CHAPTER 36 Wage-Price Flexibility and Full Employment
575041401 The Classical View
57804140101Keynes’s Criticisms of the Classical View
58004140102The Keynesian View
58304140103Keynesian Views on Money-Wage Reductions and Employment
586041402 The Keynes Effect*
58904140201Its Criticisms
591041403 Flexible Wage Policy vs Flexible Monetary Policy
59405 Part-V Inflation and Business Cycles
5940501 CHAPTER 37 Inflation and Deflation
595050101 Meaning of Inflation
33050102 “Inflation is always and everywhere a monetary phenomenon... and can be produced only by a more rapid increase in the quantity of money than output.” 3
598050103 The Inflationary Gap
603050104 Demand-Pull or Monetary Theories of Inflation
603050104011. Monetarist View or Monetary Theory of Inflation
60405010402Friedman’s View
606050104032. Keynes’ Theory of Demand-Pull Inflation
608050104043. Bent Hansen’s Excess Demand Model
61305010405Cost-Push Inflation
616050105 Demand-Pull Versus Cost-Push Inflation
618050106 We may conclude with Lipsey :“ Debate continues on the balance between demand and cost as forces causing inflation in the contermporary inflationary climate. The debate is important because the policy implications of different causes of inflation are different, and different target variables need to be controlled, according to the cause. Until the causes of inflation are fully understood, there will be debate about policies.”
621050107 Sectoral or Demand-shift Inflation
624050108 Structural Inflation
627050109 Markup Inflation
629050110 Open and Suppressed Inflation
630050111 The Phillips Curve : The Relation between Unemployment and Inflation
63805011101Tobin’s View
63905011102Solow’s View
639050112 Rational Expectations and Long-Run Phillips Curve
641050113 Policy Implications of the Phillips Curve
645050114 Stagflation
64705011401Measures to Control Stagflation
649050115 Causes of Inflation
64905011501Factors Affecting Demand
65105011502Factors Affecting Supply
652050116 Measures to Control Inflation
65205011601Monetary Measures
65305011602Fiscal Measures
65405011603Other Measures
655050117 Effects of Inflation*
655050117011. Effects on Redistribution of Income and Wealth
659050117022. Effects on Production
660050117033. Other Effects
661050118 Inflation as a Tax
664050119 Costs of Inflation
665050120 Deflation
66605012001Effects of Deflation
667050121 Comparison betwen Inflation and Deflation
668050122 Control of Deflation
66805012201Monetary Policy
66905012202Fiscal Policy
6710502 CHAPTER 38 Business Cycles
671050201 Types of Business Cycles
672050202 Characteristics of Business Cycles
673050203 Phases of a Business Cycle
676050204 Causes of Business Cycles
67605020401External Factors
67705020402Internal Factors
680050205 Effects of Business Cycles
681050206 Theories of Business Cycles
681050206011. Hawtrey’s Monetary Theory
68305020602Its Criticisms
684050206032. Hayek’s Monetary Over-Investment Theory
68605020604Its Criticisms
687050206053. Schumpeter's Innovations Theory
69005020606Its Criticisms
691050206074. The Psychological Theory
693050206085. The Cobweb Theory
69405020609Its Assumptions
69405020610The Theory
699050206116. Keynes's Theory
701050206127. Samuelson's Model of Business Cycle
70405020613Table 1. Samuelson's Interaction Model
706050206148. Hicks’s Theory of Business Cycle
71405020615Cyclical Path
71805020616Differences between Goodwin and Hicks Models
7190502061710. Friedman's Theory of Business Cycles*
7230502061811. Kaldor's Model of the Trade Cycle
728050207 Measures to Control Business Cycles or Stabilisation Policies
728050207011. Monetary Policy
72805020702Limitations of Monetary Policy
730050207033. Direct Controls
73206 Part-VI Growth Models
7320601 CHAPTER 39 The Harrod-Domar Models
732060101 Requirements of Steady Growth
733060102 The Domar Model
735060103 The Harrod Model
74006010301A Comparative Study of the Two Models
742060104 Limitations of these Models
7440602 CHAPTER 40 The Solow Model of Growth
75006020001A Critical Appraisal
7520603 CHAPTER 41 The Solow-Swan Models of Economic Growth
752060301 The Solow-Swan Model
75606030101Growth with Saving
756060302 Implications of the Model
7580604 CHAPTER 42 The Endogenous Growth Theory
758060401 The Endogenous Growth Models
759060401011. Arrow's Learning by Doing and Other Models
761060401022. The Lucas Model
76406040103Romer model can be explained in terms of the following techknological production function, ? A ( F (KA, HA, A))
76506040104Criticisms of Endogenous Growth Theory
766060402 Policy Implications of Endogenous Growth Theory
7670605 CHAPTER 43 Steady State Growth
7760606 CHAPTER 44 The Golden Rule of Accumulation
776060601 Golden Age and Golden Rule of Accumulation
78107 Part-VII Macroeconomic Policies
7810701 CHAPTER 45 Macroeconomic Policies
782070101 Policy Targets and Instruments
782070102 Objectives of Macroeconomic Policy
78207010201Full Employment
78407010202Price Stability
78707010203Balance of Payments
788070103 Conflicts or Trade-Off in Policy Objectives
79007010301Economic Growth and Price Stability
79107010302Full Employment and Balance of Payments
792070104 Problem of Coordination of Macroeconomic Policy Objectives*
79207010401The Swan Model
795070105 The Assignment Problem : The Mundellian Model
79507010501The Assignment Problem
79607010502The Mundellian Model
79907010503Criticisms of Mundell’s Model
801070106 Rules vs Discretion in Economic Policy
80207010601Expectations, the Lucas Critique and New Classical Stabilisation Policy
804070107 Lags in Effects of Economic Policy
8090702 CHAPTER 46 Monetary Policy
809070201 Meaning of Monetary Policy
809070201011. Full Employment
810070202 Instruments of Monetary Policy
811070203 Expansionary Monetary Policy
814070204 Restrictive Monetary Policy
81407020401Its Scope and Limitations
8180703 CHAPTER 47 Classical, Keynesian and Modern Views on Monetary Policy
818070301 The Classical View
819070302 The Keynesian View
821070303 The Modern View
82207030301Substitution Effects
82207030302Wealth Effects
8240704 CHAPTER 48 The Liquidity Theory of Money
825070401 The Radcliffe Committee View : Radcliffe - Sayers Thesis
8300705 CHAPTER 49 Fiscal Policy
830070501 Objectives Of Fiscal Policy
830070502 Instruments of Fiscal Policy
831070503 Compensatory Fiscal Policy
832070504 (2) Discretionary Fiscal policy
835070505 Budgetary Policies— Countercyclical Fiscal Policy
836070506 (2) Surplus Budget— Fiscal Policy during Boom
837070507 (3) Balanced Budget
840070508 Crowding out and Fiscal Policy
8460706 CHAPTER 50 Monetarism versus Keynesianism
8570707 CHAPTER 51 Is And LM Functions: General Euilibrium of Product and Money Markets
858070701 The Product Market Equilibrium
862070702 The Money Market Equilibrium
866070703 General Equilibrium of Product and Money Market
8720708 CHAPTER 52 Extensions of IS-LM Model
872070801 Effects of Changes in Monetary and Fiscal Policies by the Government
873070802 Effects of Changes in Fiscal Policy
876070803 Monetary-Fiscal Policy Mix
876070804 IS-LM Model with Labour Market and Flexible Prices
880070805 IS-LM Model with Flexible Wages and Prices : The Neo-Classical Analysis
885070806 IS-LM Model in the Keynesian Analysis with Flexible Prices and Fixed Money Wages
8920709 CHAPTER 53 Effectiveness of Monetary and Fiscal Policy
893070901 Monetary Policy
897070902 Fiscal Policy
902070903 Monetary Policy
90307090301The Classical or Monetarist Range
91208 Part-VIII Modern Macroeconomics
9120801 CHAPTER 54 The Rational Expectations Hypothesis
912080101 Adaptive Expectations
914080102 Rational Expectations
91408010201Basic Propositions of the Rational Expectations Hypothesis
91608010202Rational Expectations and the Phillips Curve
91808010203Stabilisation Policy and Ratex Hypothesis
9210802 CHAPTER 55 Supply-Side Economics
921080201 Main Features of Supply-side Economics
92208020101Tax-induced Change in Aggregate Supply
92308020102Increasing Growth Rate
924080202 Policy Prescriptions of Supply-side Economics
924080202011. The Laffer Curve : Tax Rate Vs Tax Revenue
926080202022. Reduction in Government Spending.
927080203 Criticisms of Supply-side Economics
929080204 b,0150723
9290803 CHAPTER 56 The New Classical Macroeconomic
930080301 The New Classical Macroeconomics
937080302 Policy Implications of New Classical Macroeconomics
937080302011. Policy Ineffectiveness Proposition.
938080302022. Impotency of Systematic Monetary Policy
939080302033. Policy Credibility.
939080302044. The Lucas Critique
940080302055. Policies to Increase Aggregate Supply.
941080303 Criticisms of New Classical Macroeconomics
941080303011. Rational Expectations Hypothesis Unrealistic.
941080303022. Markets do not Continuously Clear.
941080303033. Aggregate Supply Hypothesis Unacceptable.
941080303044. Policy Implications Unacceptable.
9430804 CHAPTER 57 The Real Business Cycle Theory
944080401 Role of Technological Shocks
94508040101Technological Shock
94808040102Labour Market
94808040103Interest Rate
94808040104Flexibility of Wages and Prices
94808040105Neutrality of Money
94908040106Fiscal Policy
94908040107Criticisms of the Real Business Cycle Theory
9520805 CHAPTER 58 New Keynesian Economics
952080501 Differences between New Classical and New Keynesian Macroeconomics
953080502 Main Features of New Keynesian Economics
954080502011. Sticky Nominal Wages
957080502022. Sticky Nominal Prices : Menu Costs Hypothesis
960080502033. Sticky Real Wages
96608050204Policy Implications of New Keynesian Economics
969080503 Criticisms of New Keynesian Economics
97109 Part - IX Macroeconomics in Open Economy
9710901 CHAPTER 59 Balance of Payments: Meaning and Components
971090101 Structure of Balance of Payments Accounts
976090102 Is Balance of Payments Always in Equilibrium ?
978090103 Measuring Deficit or Surplus in Balance of Payments
980090104 Balance of Trade and Balance of Payments
981090105 Disequilibrium in Balance of Payments
98409010501Implications of Disequilibrium
986090106 Measures to Correct Deficit in Balance of Payments
986090106011. Adjustment through Exchange Depreciation (Price Effect)
987090106022. Devaluation or Expenditure-Switching Policy
984090106033. Direct Controls
988090106044. Adjustment through Capital Movements
988090106055. Adjustment through Income Changes
988090106066. Stimulation of Exports and Import Substitutes
988090106077. Expenditure-Reducing Policies
9900902 CHAPTER 60 Adjustment Mechanisms of Balance of Payments
990090201 Automatic Price Adjustment Under Gold Standard
991090202 Automatic Price Adjustment Under Flexible Exchange Rates (Price Effect)
994090203 The Elasticity Approach
99409020301Marshall-Lerner Condition
999090204 The Absorption Approach
100209020401Effects of Devaluation on BOP
1006090205 The Monetary Approach
1013090206 b,0150727
10140903 CHAPTER 61 Balance of Payments Policies : Internal and External Balance
1014090301 Expenditure Changing Monetary and Fiscal Policies
1020090302 Monetary-Fiscal Mix : Internal and External Balance Policies – Mundell-Fleming Model
1020090303 Keynesian Open Economy Model.
1021090304 1. Fixed Exchange Rates with Perfect Capital Mobility
1024090305 2. Flexible Exchange Rates with Perfect Capital Mobility
1025090305013. Fixed Exchange Rates with Relative Capital Mobility
1028090305024. Flexible Exchange Rates with Relative Capital Mobility
1029090306 Monetary and Fiscal Policies for Achieving Internal and External Balance Simultaneously – Swan Model
1032090307 The Assignment Problem : The Mundellian Model of Monetary-Fiscal Policies for Internal and External Balance
1038090308 Expenditure Switching Policies
10440904 CHAPTER 62 Foreign Exchange Rate
1044090401 Meaning of Foreign Exchange Rate
1045090402 Determination of Equilibrium Exchange Rate
1048090403 Theories of Foreign Exchange Rate
1049090403011. The Mint Parity Theory : Determination Under Gold Standard
1051090403022. The Purchasing Power Parity Theory
1057090403033. The Balance of Payments Theory
1061090404 Causes of Changes in the Exchange Rate
10640905 CHAPTER 63 Foreign Exchange Rate Policy
1065090501 Fixed Exchange Rates
1065090502 Case for Fixed Exchange Rates
1070090503 Flexible Exchange Rates
1070090504 Case for Flexible Exchange rates
1071090505 Case Against Flexible Exchange Rates
1078090506 Hybrid or Intermediate Exchange Rate Systems
108309050601Dirty Float System
108309050602Exchange Rate Band
108309050603Snake in the Tunnel
1089090507 Exchange Rate Regimes in Practice
1092090508 b,0150728
1092090511 b,0150728,Jhingan-Macro end
1092090512 ### en

Muistiinpanot Highlights Примечание (Code: h)

1 (1092)
2 (1092)
M.L. JHINGAN Retired Deputy Director, Higher Education, Haryana SIMPLY THE TEXT ! VRINDA PUBLICATIONS (P) LTD.
3 (1)
VRINDA PUBLICATIONS (P) LTD. B-5, Ashish Complex (opp. Ahlcon Public School), Mayur Vihar, Phase-I, Delhi-110...
4 (1)
5 (1)
1 The Nature and Scope of Macroeconomics
6 (1)
7 (1)
2 National Income : Meaning and Measurement
8 (1)
3 Economic Welfare and National Income
9 (1)
4 National Income Accounting
10 (1)
5 The Circular Flow of Income
11 (1)
12 (1)
6 The Classical Theory of Employment
13 (1)
7 Say's Law of Market
14 (1)
8 The Principle of Effective Demand : Aggregate Demand and Aggregate Supply
15 (1)
9 The Consumption Function
16 (1)
10 Theory of the Consumption Function
17 (1)
11 The Investment Function
18 (1)
12 The Concept of Multiplier
19 (1)
13 Complex Multipliers
20 (1)
14 Foreign Trade Multiplier
21 (1)
15 The Principle of Acceleration and the Super Multiplier
22 (1)
16 Some New Theories of Investment
23 (1)
17 The Saving Function
24 (1)
18 Saving and Investment Equality
25 (1)
19 The Model of National Income Determination
26 (1)
21 The Classical Vs. Keynesian Models of Income and Employment
27 (1)
22 Unemployment and Full Employment
28 (1)
23 Applicability of Keynes's Theory to Underdeveloped Countries
29 (1)
30 (1)
24 Money
31 (1)
25 Changes in the Value of Money : The Quantity Theory of Money and its Variants
32 (1)
26 The Keynesian Theory of Money and Prices
33 (1)
27 Friedman's Restatement of the Quantity Theory of Money
34 (1)
28 The Supply of Money
35 (1)
29 Credit Creation by Commercial Banks
36 (1)
30 Central Banking : Functions and Credit Control
37 (1)
31 The Monetarist Revolution
38 (1)
32 The Demand for Money
39 (1)
33 Theories of Interest Rate
40 (1)
34 Term Structure of Interest Rate
41 (1)
35 The Real Balance Effect and Pigou Effect
42 (1)
36 Wage-Price Flexibility and Full Employment
43 (1)
44 (1)
37 Inflation and Deflation
45 (1)
38 Business Cycles
46 (1)
47 (1)
39 The Harrod-Domar Models
48 (1)
40 The Solow-Swan Model of Growth
49 (1)
41 The Solow-Swan Model of Economic Growth
50 (1)
42 The Endogenous Growth Theory
51 (1)
43 Steady State Growth
52 (1)
44 The Golden Rule of Accumulation
53 (1)
54 (1)
45 Macroeconomic Policy
55 (1)
46 Monetary Policy
56 (1)
48 The Liquidity Theory of Money
57 (1)
49 Fiscal Policy
58 (1)
50 Monetarism versus Keynesianism
59 (1)
51 IS and LM Functions : General Equilibrium of Product and Money Market
60 (1)
52 Extensions of IS-LM Model
61 (1)
53 Effectiveness of Monetary and Fiscal Policy
62 (1)
63 (1)
54 The Rational Expectations Hypothesis
64 (1)
55 Supply-side Economics
65 (1)
56 The New Classical Macroeconomics
66 (1)
57 The Real Business Cycle Theory
67 (1)
58 New Keynesian Economics
68 (1)
69 (1)
59 Balance of Payments : Meaning and Components
70 (1)
60 Adjustment Mechanisms of Balance of Payments
71 (1)
61 Balance of Payments Policies : Internal and External Balance
72 (1)
62 Foreign Exchange Rate 63 Foreign Exchange Rate Policy
73 (18)
Both microeconomics and macroeconomics involve the study of aggregates. But aggregation in microecnonmics is different from that in macroeconomics.
74 (22)
But what is true of individuals is not necessarily true of the economy as a whole.
75 (26)
It is a state, according to Clark, where five kinds of changes are conspicuous by their absence. The size of population, the supply of capital, methods of production, forms of business organisation and wants of the people remain constant, but the economy continues to work at steady pace.
76 (26)
Thus, economic statics refers to a timeless economy.
77 (29)
different equilibrium situations are compared.
78 (30)
Limitations. But comparative statics is not without limitations.
79 (30)
1. Its scope is limited for it excludes many important economic problems. There are the problems of economic fluctuations and growth which can only be studied by the method of dynamic economics.
80 (30)
2. Comparative statics is unable to explain the process of change from one position of equilibrium to another.
81 (31)
3. We are not sure when the new equilibrium will be established
82 (33)
general level of prices falls within the domain of macroeconomics. It
83 (33)
Moreover, microeconomics being based on the assumption of full employment, it failed to provide an adequate explanation of the occurrence of trade cycles.
84 (33)
But principles which are applicable to a particular household, firm or industry may not be applicable to the economy as a whole.
85 (33)
Harrod and Domar have emphasised the dual role of investment. First, it increases aggregate income, and second, it increases the productive capacity of the economy.
86 (35)
concepts of stock and flow are related to the demand for and supply of goods.
87 (35)
Lastly, both the concepts of stock and flow variables are very important in modern theories of income, output, employment, interest rate, business cycles, etc.
88 (39)
Fisher adopted 'consumption' as the criterion of national income whereas Marshall and Pigou regarded it to be production. According
89 (39)
by Fisher, only the services rendered for use during one year by them will be included in income. If an overcoat costs Rs. 100 and lasts for ten years, Fisher will take into account only Rs. 100 as national income during one year, whereas Marshall and Pigou will include Rs. 100 in the national income for the year, when it is made.
90 (40)
Simon Kuznets has defined national income as "the net output of commodities and services flowing during the year from the country's productive system in the hands of the ultimate consumers." On
91 (40)
addition to the shares of different factors, and as net national expenditure in a country in a year's time.
92 (41)
1. The Product Method. value added method to GDP or GDP at factor cost by industry of origin.
93 (41)
2. The Income Method. factor incomes : Wages and Salaries (compensation of employees) + Rent + Interest + Profit.
94 (41)
3. Expenditure Method.
95 (43)
GDP at Factor Cost = GDP at Market Price - Indirect Taxes + Subsidies.
96 (45)
First, GNP is the measure of money, in which all kinds of goods and services produced in a country during one year are measured in terms of money at current prices and then added together.
97 (45)
Second, in estimating GNP of the economy, the market price of only the final products should be taken into account.
98 (46)
Third, goods and services rendered free of charge are not included in the GNP, because it is not possible to have a correct estimate of their market price.
99 (46)
Fourth, the transactions which do not arise from the produce of current year or which do not contribute in any way to production, are not included in the GNP.
100 (46)
Fifth, the payments received under social security, e.g., unemployment insurance allowance, old age pension, and interest on public loans are also not included in GNP,
101 (46)
Sixth, the profits earned or losses incurred on account of changes in capital assets as a result of fluctuations in market prices are not included in the GNP
102 (46)
Last, the income earned through illegal activities is not included in the GNP. Although the goods sold in the black market are priced and fulfil the needs of the people,
103 (46)
One, the income method to GNP; two, the expenditure method to GNP; and three, the value added method to GNP. Since gross income equals gross expenditure, GNP estimated by all these methods would be the same with appropriate adjustments.
104 (47)
(i) Wages and salaries.
105 (47)
(ii) Rents.
106 (47)
(iii) Interest.
107 (47)
(iv) Dividends.
108 (47)
(v) Undistributed corporate profits.
109 (48)
(vi) Mixed incomes.
110 (48)
(vii) Direct taxes.
111 (48)
(viii) Indirect taxes.
112 (48)
(ix) Depreciation.
113 (48)
(x) Net income earned from abroad.
114 (48)
49 866: 20150514@ hgx:GNP according to the Income Method = Wages and Salaries + Rents + Interest + Dividends + Undistributed Corporate Profits + Mixed Income + Direct Taxes + Indirect Taxes + Depreciation + Net Income from abroad.
115 (49)
(i) Private consumption expenditure.
116 (49)
(ii) Gross domestic private investment.
117 (49)
(iii) Net foreign investment.
118 (49)
(iv) Government expenditure on goods and services.
119 (54)
NNP = GNP— Depreciation.
120 (55)
Domestic income includes : (i) Wages and salaries, (ii) rents, including imputed house rents, (iii) interest, (iv) dividends, (v) undistributed corporate profits, including surpluses of public undertakings, (vi) mixed incomes consisting of profits of unincorporated firms, self-employed persons, partnerships, etc., and (vii) direct taxes.
121 (55)
Domestic Income = National Income— Net income earned from abroad.
122 (56)
Thus Private Income = National Income (or NNP at Factor Cost) + Transfer Payments + Interest on Public Debt — Social Security — Profits and Surpluses of Public Undertakings.
123 (56)
Personal income differs from private income in that it is less than the latter because it excludes undistributed corporate profits.
124 (57)
Disposable Income = Personal Income – Direct Taxes.
125 (58)
This is also known as national income at constant prices.
126 (61)
number of goods and services which are difficult to be assessed in money terms for the reason stated above, such as painting, singing, dancing, etc. as hobbies.
127 (73)
h.'Welfare' is a state of the mind which reflects human happiness and satisfaction. In
128 (73)
Pigou: social welfare as the sum total of individual welfares. He divides welfare into economic welfare and non-economic welfare. Economic Welfare is that part of social welfare which can directly or indirectly be measured in money.
129 (74)
they spend their increased income on harmful commodities like wine, cigarettes etc. Hence, economic welfare is not an indicator of total welfare.
130 (74)
Pigou establishes a close relationship between economic welfare and national income,
131 (75)
In other words, the rich become richer and the poor become poorer. Thus when the economic welfare of the rich increases and that of the poor decreases, the total economic welfare decreases.
132 (76)
Changes in Distribution of National Income.
133 (77)
Heavy taxation and progressive taxes at high rates affect adversely the productive capacity, investment and capital formation, thereby decreasing the national income.
134 (78)
Quality of Life.
135 (78)
On the other hand, in places where there is no congestion, people enjoy fresh air and the beauty of nature, the quality of life tends to increase. But this is not reflected in GNP.
136 (79)
A pioneering attempt toward this direction has been made by Professors Nordhaus and Tobin2 in 1972. They have constructed a 'Measure of Economic Welfare' which they call MEW. Professor Samuelson calls it 'Net Economic Welfare', or NEW.
137 (79)
"regrettable necessities", such as government expenditures on national defence, police force, road maintenance, and sanitation services, and expenses by consumers on commuting (i.e., travelling regularly by train,scooter, car or bus between one's residence and place of work). (2) All consumer expenditures on durable household goods such as washing machines, cars, TV sets, etc. which yield utility over their lifetime. (3) Estimated costs arising from "negative externalities" which are disamenities arising from urbanisation, congestion and pollution. All these reduce human welfare.
138 (80)
Nordhaus and Tobin add three items to consumption. They are: (1) the value of non-market activities; (2) the estimates of the value of the services of durable consumer goods actually consumed by the owners, both households and government; and (3) the estimates of the value of leisure.
139 (80)
The opportunity cost approach is based on the principle that when a person chooses to enjoy more leisure, it is always at the cost of foregoing more income.
140 (81)
term 'social accounting' was first introduced into economics by J.R. Hicks in 1942. In
141 (87)
functional accounts,
142 (89)
(6) In Explaining Trends in Income Distribution.
143 (89)
(7) In Explaining Movements in GNP.
144 (89)
(8) Provide a Picture of the Working of Economy.
145 (89)
(9) In Explaining Interdependence of Different Sectors of the Economy.
146 (90)
(11) Helpful in Big Business Organisations.
147 (90)
(12) Useful for International Purposes.
148 (91)
2. Double Counting.
149 (91)
3. Public Services.
150 (91)
4. Inventory Adjustments.
151 (92)
The columns and rows of an input-output table 'provide industrial breakdowns of the final expenditures and income payments that enter into the national income accounts.'
152 (93)
It may be noted that the row total must equal the column total of the economy in the input-output table. It means that total gross output must equal the total gross input of the economy.
153 (95)
Xij stands for the amount absorbed by the jth industry of ith industry.
154 (96)
A number of structural equations xij = aij.Xj give a summary description of the economy's existing technological conditions. The table showing input co-efficients is called "a technology matrix".
155 (98)
Despite these limitations, the concept of input-output is of tremendous practical value and importance.
156 (98)
(4) The input-output model has come to be used for national income accounting "because it provides a more detailed breakdown of the macro aggregates and money flows."
157 (98)
The flow of funds accounts were developed by Prof. Morris Copeland1 in 1952 to overcome the weaknesses of national income accounting.
158 (102)
1. The flow of funds accounts are more complicated than the national income accounts because they involve the aggregation of a large number of sectors with their very detailed financial transactions.
159 (110)
There are three ways of measuring deficit or surplus in the balance of payments.
First, there is the basic balance which includes the current account balance and the long-term capital account balance.
Second, there is the net liquidity balance which includes the basic balance and the short-term private non-liquid capital balance, allocation of SDRs, and errors and omissions.
Third, there is the official settlements balance which includes the total net liquid balance and short-term private liquid capital balance.
160 (114)
Expenditure has now two alternative paths from household and product markets: (i) directly via consumption expenditure, and (ii) indirectly via investment expenditure.
161 (114)
Circular Flow in a Three-sector Closed Economy
162 (115)
Taxation is a leakage from the circular flow and government purchases are injections into the circular flow.
163 (115)
Thus government purchases of goods and services are an injection in the circular flow of income and taxes are leakages.
164 (118)
circular flow is of immense significance for studying the functioning of the economy and for helping the government in formulating policy measures.
165 (121)
The Gerneral Theory was written against the background of classical thought. By the "classicists" Keynes meant "the followers of Ricardo, those, that is to say, who adopted and perfected the theory of Ricardian economics." They included, in particular, J.S. Mill, Marshall and Pigou.
166 (122)
Its Assumptions The classical theory of output and employment is based on the following assumptions :
1. There is the existence of full employment without inflation.
2. There is a laissez-faire capitalist economy without government interference.
3. It is a closed economy without foreign trade.
4. There is perfect competition in labour and product markets.
5. Labour is homogeneous.
6. Total output of the economy is divided between consumption and investment expenditures.
7. The quantity of money is given and money is only the medium of exchange.
8. Wages and prices are perfectly flexible.
9. There is perfect information on the part of all market participants.
10. Money wages and real wages are directly related and proportional.
11. Savings are automatically invested and equality between the two is brought about by the rate of interest
12. Capital stock and technical knowledge are given.
13. The law of diminishing returns operates in production.
14. It assumes long run.
167 (122)
Given these assumptions, the determination of output and employment in the classical theory occurs in labour, goods and money markets in the economy.
168 (123)
Thus the very act of supplying (producing) goods implies a demand for them. It is in this way that supply creates its own demand.
169 (123)
Q = f (K, T, N)
where total output (Q) is a function (f) of capital stock (K), technical knowledge (T), and the number of workers (N).
170 (123)
DN = f (W/ P)
where DN = demand for labour, W = wage rate and P = price level. Dividing wage rate (W) by price level (P), we get the real wage rate (W/ P).
171 (125)
This argument is based on the assumption that there is a direct and proportional relation between money wages and real wages. When money wages are reduced, they lead to reduction in cost of production and consequently to the lower prices of products. When prices fall, demand for products will increase and sales will be pushed up. Increased sales will necessitate the employment of more labour and ultimately full employment will be attained.
172 (127)
Thus saving must equal investment. If there is any divergence between the two, the equality is maintained through the mechanism of the rate of interest. To them, both saving and investment are the functions of the interest rate,
173 (127)
The equation is MV = PT, where M = supply of money, V = velocity of circulation of M, P = Price level, and T = volume of transaction or total output.
The equation tells that the total money supply MV equals the total value of output PT in the economy. Assuming V and T to be constant, a change in the supply of money (M) causes a proportional change in the price level (P). Thus the price level is a function of the money supply : P = f (M).
174 (128)
If the quantity of money increases, the MV curve will shift to the right as M1V curve. As a result, the price level would rise from OP to OP1, given the same level of output OQ.
175 (129)
The classical theory of employment was based on the assumption of full employment where full employment was a normal situation and any deviation from this was regarded as an abnormal situation. This was based on Say's Law of Market.
176 (130)
quantity of money is a function of the price level, P = f (MV). Changes in the general price level are proportional to the quantity of money. The equilibrium in the money market is shown by the equation MV = PT where MV is the supply of money and PT is the demand for money.
177 (131)
(1) Underemployment Equilibrium. Keynes rejected the fundamental classical assumption of full employment equilibrium in the economy.
178 (131)
(2) Refutation of Say's Law.
part of the earned income is saved and is not automatically invested because saving and investment are distinct functions.
Thus Keynes rejected Say's Law that supply created its own demand. Instead he argued that it was demand that created supply. When aggregate demand rises, to meet that demand, firms produce more and employ more people.
179 (131)
(3) Self-adjustment not Possible.
180 (131)
(4) Equality of Saving and Investment through Income
181 (132)
Thus it is variations in income rather than in interest rate that bring the equality between saving and investment.
182 (132)
(5) Importance of Speculative Demand for Money.
Thus the rate of interest will not fall below a certain minimum level, and the speculative demand for money would become perfectly interest elastic. This is Keynes 'liquidity trap' which the classicists failed to analyse.
183 (133)
(6) Rejection of Quantity Theory of Money.
184 (133)
(7) Money not Neutral.
Keynes criticised the classical view that monetary theory was separate from value theory.
Thus Keynes integrated monetary and real sectors of the economy.
185 (133)
(8) Refutation of Wage-Cut.
186 (133)
Moreover, social justice demands that wages should not be cut if profits are left untouched.
187 (134)
(9) No Direct and Proportionate Relation between Money and Real Wages.
Moreover, institutional resistances to wage and price reductions are so strong that it is not possible to implement such a policy administratively.
188 (134)
(10) State Intervention Essential.
The capitalist system is such that left to itself it is incapable of using productive power fully. Therefore, state intervention is necessary.
So Keynes favoured state action to utilise fully the resources of the economy for attaining full employment.
189 (134)
(11) Long-Run Analysis Unrealistic.
Keynes had no patience to wait for the long period for he believed that "In the long-run we are all dead". As pointed by Schumpeter, "His philosophy of life was essentially a short-term philosophy."
Thus the classical theory of employment is unrealistic and is incapable of solving the present day economic problems of the capitalist world.
190 (136)
Production Creates Market (Demand) for Goods.
191 (136)
Barter System as its Basis.
192 (136)
138 2458: 20150515@ hgx:General Overproduction Impossible.
193 (137)
Saving-Investment Equality.
194 (137)
Rate of Interest as a Determinant Factor.
195 (137)
Labour Market.
196 (137)
Unemployment results from rigidity in the wage structure and interferences in the working of the free market economy.
197 (138)
2. Proper Utilization of Resources.
198 (138)
3. Perfect Competition.
199 (138)
(b) Automatic Adjustment Mechanism. The
200 (138)
(c) Role of Money as Neutral.
201 (138)
5. Saving as a Social Virtue.
202 (139)
J.M. Keynes in his General Theory made a frontal attack on the classical postulates and Say's law of markets. He criticised Say's law of markets on the following grounds:
203 (139)
2. Self-adjustment not Possible.
204 (139)
3. Money is not Neutral.
205 (139)
4. Over Production is Possible.
206 (139)
5. Underemployment Situation.
207 (139)
6. State Intervention.
208 (140)
Keynes, therefore, advocated state intervention for adjusting supply and demand within the economy through fiscal and monetary measures.
209 (140)
8. Wage-cut no Solution.
210 (140)
9. Demand Creates its own supply.
211 (141)
Unemployment results from the deficiency of effective demand because people do not spend the whole of their income on consumption.
212 (141)
The logical starting point of Keynes's theory of employment is the principle of effective demand.
213 (142)
according to Keynes, the level of employment is determined by effective demand which, in turn, is determined by aggregate demand price and aggregate supply price.
214 (142)
"The aggregate demand function," according to Keynes, "relates any given level of employment to the expected proceeds from that level of employment." Table I shows the aggregate demand schedule.
215 (145)
The level of employment is determined at the point where the aggregate demand price equals the aggregate supply price.
216 (147)
supply function to be given because it depends on the technical conditions of production, the availability of raw materials, machines etc. which do not change in the short run. It is, therefore, the aggregate demand function which plays a vital role in determining the level of employment in the economy.
217 (148)
It is the soul of the Keynesian theory of employment. Dr Klein attributes the Keynesian revolution solely to the development of a theory of effective demand.
218 (148)
Thus unemployment is caused by a deficiency of effective demand.
219 (148)
In brief, Effective Demand = Value of National Output = Volume of Employment = National Income = National Expenditure = Expenditure on consumption goods + Expenditure on investment goods.
220 (149)
importance of the principle of effective demand lies in pointing out the cause and remedy of unemployment. Unemployment is caused by a deficiency of effective demand and it can be removed by an increase in consumption expenditure or/ and investment expenditure and in case the private expenditures are insufficient and ineffective in bringing about the required level of employment, the same can be achieved by government expenditure. Thus the principle of effective demand is the basis of the theory of employment.
221 (149)
that underemployment equilibrium is a normal situation and full employment equilibrium is accidental.
222 (150)
Therefore, the level of effective demand and hence of employment can be raised by an increase in investment. In this lies the importance of investment.
223 (150)
It follows that in a poor community, the gap between income and consumption is small because the marginal propensity to consume is high. It will, therefore, have little difficulty in employing all its resources by filling the gap through small investment expenditure.
224 (150)
On the contrary, in a wealthy community the gap between income and consumption is very large because the marginal propensity to consume is low. It will, therefore, require large investment expenditure to fill the gap between income and consumption in order to maintain a high level of income and employment. But in a rich community investment demand is not adequate to fill this gap and there emerges a deficiency of aggregate demand resulting in widespread unemployment. When the aggregate demand falls, the potential wealthy community will be forced to reduce its actual output until it becomes so poor that the excess of output over consumption will be reduced to the actual amount of investment. Further, in such a community there is an accumulated stock of capital assets which weakens the inducement to invest because every new investment competes with an already existing large supply of old capital assets.
225 (152)
The consumption function or propensity to consume refers to income-consumption relationship. It is a "functional relationship between two aggregates, i.e., total consumption and gross national income." 1 Symbolically, the relationship is represented as C = f (Y), where C is consumption, Y is income, and f is the functional relationship.
226 (153)
income, C1C2 < Y1Y2. The portion of income not consumed is saved as shown by the vertical distance between 45 ° line and C curve, i.e., SS1. "Thus the consumption function measures not only the amount spent on consumption but also the amount saved. This is because the propensity to save is merely the propensity not to consume. The 45 ° line may therefore be regarded as a zero-saving line, and the shape and position of the C curve indicate the division of income between consumption and saving."
227 (155)
Keynes is concerned primarily with the MPC, for his analysis pertains to the shor-run while the APC is useful in the long-run analysis.
228 (156)
The Keynesian hypothesis that the marginal propensity to consume is positive but less than unity( O < ? C/ ? Y < 1) is of great analytical and practical significance. Besides "( a) the theoretical possibility of general over production or 'underemployment equilibrium,' and also (b) the relative stability of a highly developed industrial economy.
229 (156)
three related propositions: (1) When income increases, consumption expenditure also increases but by a smaller amount. The reason is that as income increases, our wants are satisfied side by side, so that the need to spend more on consumer goods diminishes.
230 (159)
assumption that the psychological and institutional complexes influencing consumption expenditure remain constant. Such complexes are income distribution, tastes, habits, social customs, price movements, population growth, etc. In the short run, they do not change and consumption depends on income alone.
231 (160)
If, however, the economy is faced with abnormal and extraordinary circumstances like war, revolution or hyperinflation, the law will not operate. People may spend the whole of increased income on consumption.
232 (160)
People should be free to spend increased income.
233 (160)
Keynes's psychological law invalidates Say's Law because as income increases, consumption also increases but by a smaller amount.
234 (160)
As a corollary to the above, the psychological law highlights the need for state intervention. Say's Law is based on the existence of laissez-faire policy and its refutation implies that the economic system is not self-adjusting.
235 (162)
This long-run tendency of increase in saving and fall in investment is characterised as secular stagnation.
236 (163)
People continue to buy consumer goods even when their income falls. So when the excess stock of commodities is exhausted in the community during a depression, the existence of consumer expenditure on goods leads to revival.
237 (164)
influence the consumption function and determine its slope and position. They are (i) the subjective factors, and (ii) the objective factors.
238 (164)
The objective factors are exogenous or external to the economic system. They may, therefore, undergo rapid changes and may cause marked shifts in the consumption function (i.e., the C curve).
239 (164)
(i) the desire to build reserves for unforeseen contingencies;
(ii) the desire to provide for anticipated future needs,
(iii) the desire to enjoy and enlarged future income by way of interest and appreciation;
(iv) the desire to enjoy a gradually increasing expenditure in order to improve the standard of living;
(v) the desire to enjoy a sense of independence and power to do things;
(vi) the desire to secure a "masse de manoeuver" to carry out speculative or business projects;
(vii) the desire to bequeath a fortune;
(viii) the desire to satisfy a pure miserly instinct.
240 (165)
(i) enterprise, the desire to do big things and to expand;
(ii) liquidity, the desire to meet emergencies and difficulties successfully;
(iii) income raise, the desire to secure large income and to show successful management;
(iv) financial prudence, the desire to provide adequate financial resources against depreciation and obsolescence, and to discharge debt.
241 (165)
If, however, the rise in the wage rate is accompanied by a more than proportionate rise in the price level, the real wage rate will fall and it will tend to shift the C curve downward. A cut in the wage rate will also reduce the consumption function of the community
242 (165)
taxation adversely affect the consumption function by reducing the disposable income of the people. This is what actually happened during the Second World War when the consumption function shifted downward due to heavy indirect taxation, rationing and price controls.
243 (168)
'demonstration effect.' There is a tendency in human beings not only to keep up with the Joneses but also to surpass the Joneses,
244 (169)
therefore, provide larger social security measures to raise the propensity to consume of the people.
245 (171)
"Keynes's discovery of the consumption function must be regarded as one of the major breakthroughs of modern economics." Discuss.
"Keynes's consumption function is an epoch making tool in economic analysis." Discuss.
"Keynes's consumption function is an epoch-making contribution to the tools of economic analysis."
246 (175)
Smithies and Tobin discuss the following factors:
247 (178)
"social character of consumption paterns"
248 (178)
when income decreases, consumption does not fall in the same proportion because of the Ratchet Effect.
249 (178)
"past peak of income"
250 (183)
Ym or
Y = YP + Yt ...( 1)
and C = CP + Ct ...
( 2)
where p refers to permanent, t refers to transitory, Y to income and C to consumption.
251 (188)
Friedman gives a series of assumptions concerning the relationships between permanent and transitory components of income and consumption.
252 (188)
1. There is no correlation between transitory income and permanent income.
2. There is no correlation between permanent and transitory consumption.
3. There is no correlation between transitory consumption and transitory income.
4. Only differences in permanent income affect consumption systematically.
253 (191)
The life cycle hypothesis is based on the following assumptions:
254 (11)
opportunities and social pressures which will impinge upon his consumption spending.
10. The consumer is rational.
255 (195)
1. The life cyclehypothesis solves the consumption puzzle.
256 (196)
2. The life cycle hypothesis reveals that savings change over the life time of a consumer.
257 (196)
3. The life cycle hypothesis also implies that a high-income family consumes a smaller proportion of his income
258 (198)
Thus capital is a stock concept.
259 (200)
(i) The average propensity to invest is the ratio of investment to income,
260 (199)
(ii) The marginal propensity to invest is the ratio of change in investment to the change in income,
261 (203)
Merits NPV method has the following merits:
(i) This method considers time value of money.
(ii) It considers the cash flows of the project in different time periods.
(iii) It is more scientific than traditional methods.
262 (203)
Demerits There are also some demerits of this method:
(i) It is difficult to calculate the profit cost with this method.
(ii) It is difficult to work out especially the cost of equity capital by this method.
(iii) It is not applicable without the knowledge of cost of capital.
(iv) It favours long-run investment projects.
(v) When projects with different investments are compared, this method does not give correct result.
(vi) Its assumption that the intermediate cash flows are reinvested on the capital cost of the firms, is not always true.
(vii) This method gives different rankings in the case of complicated projects in comparison to other methods.
263 (218)
The absence of new technologies will mean low inducement to invest.
264 (220)
concept of multiplier was first developed by R.F. Kahn in his article "The Relation of Home Investment to Unemployment" in the Economic Journal of June 1931.
265 (225)
(1) There is change in autonomous investment and that induced investment is absent.
(2) The marginal propensity to consume is constant.
(3) Consumption is a function of current income.
(4) There are no time lags in the multiplier process. An increase( decrease) in investment instantaneouly leads to a multiple increase( decrease) in income.
(5) The new level of investment is maintained steadily for the completion of the multiplier process.
(6) There is net increase in investment.
(7) Consumer goods are available in response to effective demand for them.
(8) There is surplus capacity in consumer goods industries to meet the increased demand for consumer goods in response to a rise in income following increased investment.
(9) Other resources of production are also easily available within the economy.
(10) There is an industrialised economy in which the multiplier process operates.
(11) There is a closed economy unaffected by foreign influences.
(12) There are no changes in prices.
(13) The accelerator effect of consumption on investment is ignored.
(14) There is less than full employment level in the economy.
266 (229)
time lag is always involved between the receipt of income and its expenditure on consumption goods
267 (229)
Hicks, Samuelson and others have shown that it is the interaction of the multiplier and the accelerator which helps in controlling business fluctuations.
268 (231)
Thus the multiplier is regarded as an indispensable tool in trade cycles.
269 (231)
(a) To achieve full employment.
270 (231)
(b) To control trade cycles. The
271 (232)
(c) Deficit financing.
272 (232)
(d) Public investment.
273 (232)
economic activity cannot be left to the vagaries and uncertainties of private enterprise. Hence, the importance of multiplier in public investment lies in creating or controlling income and employment. The state can have the greatest multiplier effect on income and employment by increasing public investment during a depression where the MPC is high (or the MPS is low).
274 (233)
The dynamic multiplier relates to the time lags in the process of income generation.
275 (247)
with, the exporters will sell their products to foreign countries and receive more income. In order to meet the foreign demand, they will engage more factors of production to produce more.
276 (248)
1. There is full employment in the domestic economy.
2. There is direct link between domestic and foreign country in exporting and importing goods.
3. The country is small with no foreign repercussion effects.
4. It is on a fixed exchange rate system.
5. The multiplier is based on instantaneous process without time lags.
6. There is no accelerator.
7. There are no tariff barriers and exchange controls.
8. Domestic investment (Id ) remains constant.
9. Government expenditure is constant.
277 (255)
The term “acceleration principle” itself was first introduced into economics by J. M. Clark1 in 1917. It was further developed by Hicks, Samuelson, and Harrod in relation to the business cycles.
278 (256)
The acceleration principle can be expressed in the form of the following equation. 2
Igt = v (Yt– Yt– 1 ) + R
= v ? Yt + R
where Igt is gross investment in period t, v is the accelerator, Yt is the national output in period t, Yt-1 is the national output in the previous period (t— 1), and R is the replacement investment.
279 (262)
Conclusion. Despite these limitations, the principle of acceleration makes the process of income propagation clearer and more realistic than the multiplier theory. The multiplier shows the effect of a change in investment on income via consumption while the acceleration shows the effect of consumption or output on investment and income.
280 (269)
First, the classical theory that investment is a function of the rate of interest. Second, the Keynesian theory that investment is a function of income and rate of interest. Third, the acceleration theory that investment is a function of the change in output or income.
281 (272)
the capital stock adjustment model.
the decision-making lag.

administrative lag
financial lag
delivery lag
282 (273)
Koyck's approach to the flexible accelerator assumes that the actual capital stock depends on all past output levels with weights declining geometrically. Accordingly, Kt = (1 – ? ) vYt + ?Kt– 1
283 (274)
The net investment (Kt – Kt– 1 ) is called the distributed lag accelerator which is inversely related to the capital stock of the previous period and is positively related to the output level.
284 (274)
flexible accelerator or the stock adjustment principle.
285 (275)
Its Comparison with Naive Accelerator
286 (276)
liquidity version of the profits theory.
287 (276)
Kt* = f (p t– 1)
where Kt* is the optimal capital stock and f ( p t– 1) is some function of past actual profits.
288 (280)
Business Cycles and Economic Growth: investment as a function of income (Y), capital stock (K), profits (p) and capital consumption allowances (R). All these are independent variables and can be represented as
I = f (Yt– 1, Kt– 1, pt– 1, Rt )
289 (281)
It = a Yt– 1 + ß Kt– 1
290 (281)
Ct = f (Yt– 1 – p t– 1 – Rt– 1 + dt )
291 (282)
Kt = (1– k) Kt– 1 + It
292 (282)
This is a generalised version of a multiplier-accelerator process.
293 (283)
Thus an increase in income will have a smaller immediate effect on expenditure than would occur in a simple multiplier-accelerator model.
294 (284)
internal funds and external funds.
295 (290)
Jorgenson develops his theory of investment on the assumption that the firm maximises its present value.
296 (296)
which links a firm's investment decisions to fluctuations in the stock market. When a firm finances its capital for investment by issuing shares in the stock market, its share prices reflect the investment decisions of the firm. Firm's investment decisions depend on the following ratio, called Tobin'sq: The market value of firm's capital stock in the numerator is the value of its capital as determined by the stock market.
297 (297)
According to Tobin, net investment would depend on whether q is greater than (q > 1) or less than 1 (q < 1). If q > 1, the market value of the firms shares in the stock market is more than the replacement cost of its real capital, machinery etc. The firm can buy more capital and issue
298 (299)
  1. Summarise the accelerator theory of investment and provide examples of situations when this theory will not work.
  2. Critically discuss the accelerator theory of investment.
  3. Explain the flexible theory of investment.
  4. Explain how adjustment is made when there are lags between levels of output and capital stock in the theory of accelerator.
  5. Explain the profits theory of investment.
  6. Explain the “cost of funds” theory of investment.
  7. How has Duesenberry integrated the accelerator principle with the profits theory of investment?
  8. Explain the financial theory of investment.
  9. Critically examine the neoclassical theory of investment.
  10. Explain Tobin's q of theory of investment.

299 (309)
(a) Keynes does not agree with the classical view that the equality between saving and investment is brought about through the mechanism of the interest rate.
300 (311)
Thus saving and investment are the same thing. They are both the difference between income and consumption. So defined, they are always equal.
301 (311)
Criticism. This equality or rather identity between saving and investment which Keynes established in his General Theory has been severely criticised.
302 (315)
But Professor Klein does not agree with Lutz that the Robertsonian analysis of saving and investment is dynamic in the true sense. In his words: "Robertson's definitions are dynamic only in the most trivial sense.
303 (325)
a lumpsum tax
proportional tax
304 (337)
  1. How is equilibrium level of income determined under the Keynesian system ?
  2. Is it possible to have equilibrium in the level of national income without achieving full employment ?
  3. "The level of employment is determined by the level of income which in turn depends upon aggregate demand." Comment.
  4. Explain Keynes's under-employment equilibrium.

305 (338)
Keynes also did the same thing. He accepted the classical theory, criticised and extended it and at the same time rejected parts of it. The main elements of the General Theory can be found embryonic form in the works of his predecessors but Keynes’s novelty lies in giving them a new complexion. As rightly observed by Harris, "Out of the straws of his predecessors, with some additions of his own, he had built a structure which no economist or economic practitioner can afford not to inspect or use." No doubt the Keynesian economics is built on the classical economics but it differs significantly from the latter in terms of assumptions, presentation of tools of analysis and policy measures.
306 (339)
The following points mark Keynesian theory as revolutionary and a genuine departure from the classical economics.
307 (339)
"Keynes's greatest achievement," according to Prof. Sweezy "was the liberation of Anglo-American economics from this tyrannical dogma." 2 Keynes propounded the opposite view that demand creates its own supply.
308 (339)
"Consumption function is an epoch making contribution to the tools of economic analysis."
309 (340)
He, therefore, favoured state intervention and stressed the importance of public investment to fill the gap created by the deficiency of private investment. "Viewing Keynes's theory as a whole, its revolutionary nature lies," according to Prof. Dillard, "in the repudiation of any presumption in favour of laissez-faire."
310 (341)
"Keynesian revolution commands the field."
311 (342)
We may conclude that the General Theory is not evolutionary but is revolutionary in both economic thought and policy and is a genuine departure from the classical thought.
312 (344)
another fallacious by-product of the usual Keynesian neglect of the supply side of the commodity market."
313 (344)
According to Prof. Burns, the determination of Keynes's theory in terms of effective demand "reflects a pleasant but dangerous illusion."
314 (344)
epoch-making contribution to the tools of economic analysis yet it is not free from defects.
315 (345)
Thus Keynes ignores the impact of technology on the economy.
316 (345)
There is “money illusion” in the Keynesian speculative demand for money which means that the increased supply of money is absorbed only at a lower rate of interest.
317 (345)
Further, Keynes failed to consider the influence of price expectations on the demand for money.
318 (346)
Keynes has been criticised for his over emphasis on expectations. Expectations breed uncertainty.
319 (347)
decrease in labour input without requiring a priori increase in real wage rate."
320 (347)
"Keynes's explanation of the crisis of the marginal efficiency of capital is either a useless truism or an obvious error."
321 (347)
One of the serious omissions of Keynes’s theory is the acceleration principle. This made his theory of business cycles one-sided because his explanation centres round the principle of multiplier.
322 (348)
"The 'dynamic' nature of Keynes' shifting equilibrium suggests that he is thinking dynamically, since there can be no shift from one position of equilibrium to another without prior movements of variables through time. Keynes made no attempt to show the process of transition from one position of equilibrium to another, however. His method of comparing different equilibrium levels of income has been termed comparative statics. Prof. Ackley calls the Keynesian model as "too static."
323 (348)
Keynes’ analysis unrealistic because all economies are open economies, and foreign trade has an important impact on their level of employment.
324 (349)
it is not a general theory but a special theory which is applicable only under static conditions in a perfectly competitive closed economy.
325 (349)
"Those who seek universal truths applicable in all places and at all times, had better not waste their time on the General Theory."
326 (350)
(a) To fight unemployment, Keynes recommended the policy of deficit spending. But this policy has serious repercussions, because the state may spend beyond its means in an extravagant manner.
327 (350)
(b) Keynes's favoured public investment to overcome depression and to attain full employment.
328 (350)
(c) Keynes advocated progressive taxation to control inflationary trends in the economy. But higher taxes on companies may discourage private investment, and high commodity taxes may discourage consumption.
329 (350)
(d) Keynes paid little attention to monetary policy. In the Keynesian system money in neutral in situations of full employment and liquidity trap (when the rate of interest becomes inelastic in a depression). the Keynesian analysis because monetary policy plays an important role even during these extreme situations, as has been proved by Friedman, Metzler, Patinkin and others.
330 (351)
(e) Keynes' policy measures fail to tackle the problems of capital formation and growth which result from technological innovations.
331 (351)
(f) Lastly, the Keynesian economics fails to provide solutions to a number of socio-economic problems facing the developed countries. Such problems include fair employment, income distribution and resource allocation. This is a serious weakness in Keynesian policy measures.
332 (351)
Dillard writes, “Keynes was an original thinker in the sense that he arrived at his ideas in his own way. The ideas he advanced were his own even though some one else may have expounded the
333 (351)
Despite Samuelson's severe denunciation of the General Theory as a "badly-written book, poorly organised... not well-suited for classroom use, ... arrogant, bad tempered, polemical, not overly generous in its acknowledgements and abounding in meads and confusions,"
334 (351)
Keynes's theory of effective demand is the origin of the modern theory of economic policy." And according to Dillard, "The acceptance of deficit financing as a respectable type of public policy is one of the remarkable changes in public thinking for which Keynesian economics has been primarily responsible."
335 (351)
General theory was "one of the great intellectual scandals of our age." In fact, Schumpeter's assessment of Malthus applies fairly to Keynes. Keynes "had the good forture— for this is good fortune— to be the subject of equally unreasonable, contradictory appraisals. He was a benefactor of humanity. He was a fiend. He was a profound thinker. He was a dunce. The man whose work stirred people's minds so as to elicit such passionate appraisals was ipso facto no mediocrity." Rather, he was a genius.
336 (359)
(1) The Keynesian theory is based on the existence of cyclical un-employment which occurs during a depression. It is caused by deficiency in effective demand.
337 (359)
(2) The Keynesian economics is a short period anaylsis in which Keynes takes “as given the existing skill and quantity of available labour,
338 (360)
(3) The Keynesian theory is based on the assumption of closed economy.
339 (360)
(4) The Keynesian Theory assumes an excess supply of labour and other complementary resources in the economy.
340 (361)
however, there is no involuntary unemployment but disguised unemployment.
341 (363)
The Keynesian concept of multiplier is based on the following four assumptions: (a) Involuntary unemployment, (b) an industrialized economy where the supply curve of output slopes upward to the right but does not become vertical till after a substantial interval, (c) excess capacity in the consumption goods industries, and (d) comparatively elastc
342 (364)
(a) Involuntary unemployment in the Keynesian analysis is associated with a capitalist economy where the majority of workers work for wages
343 (365)
(b) The supply curve of output in an underdeveloped country is inelastic which renders the working of the multiplier all the more difficult.
344 (365)
(c) Since the marginal propensity to consume is high in underdeveloped countries, the inceased income is spent on self consumption
345 (366)
(d) Output is difficult to increase due to the non-availability of sufficient raw materials, capital equipment and skilled labour.
346 (368)
Scitovsky, “Money is a difficult concept to define, partly because it fulfils not one but three functions, each of them providing a criterion of moneyness ... those of a unit of account, a medium of exchange, and a store of value.”
347 (369)
Sir John Hicks to say that “money is defined by its functions: anything is money which is used as money: ‘money is what money does.’
348 (371)
Thus the whole liquidity position is relevant to spending decisions.
349 (374)
Thus time deposits are not ‘real’ money and for them to become money they must be converted into cash or demand deposits.
350 (375)
The tremendous growth of near money assets in the United States is due to the fact that the yield from them is higher than from demand deposits and that they are safer than cash.
351 (376)
inside money as money “based on the debt of endogenous economic units”.
352 (376)
outside money comes from outside the private sector. It is defined as money “based on the debt of a unit (the government) exogenous to the system.”
353 (378)
In other words, money is neutral if it does not affect relative prices and leaves the interest rate unaffected.
354 (378)
In the classical system, money is neutral in its effect on the economy. It plays no role in the determination of employment, income and output.
355 (379)
In the entire Keynesian system, there are two situations in which money is neutral. The first is the situation of full employment when any increase in the quantity of money brings about a proportionate increase in the price level but output remains unchanged at that level. The second is the special case of liquidity trap. When
356 (380)
Non-Neutrality of Money. In the Keynesian system so long as there is unemployment, changes in the money supply produce permanent non-neutral effects on the rate of interest, the level of employment, income and output, the rate of capital formation, and so on.
357 (380)
This is the primary function of money because it is out of this function that its other functions developed. By
358 (380)
Money is the standard for measuring value just as the yard or metre is the standard for measuring length.
359 (384)
(ii) Basis of the Credit System.
360 (384)
(iii) Equaliser of Marginal Utilities and Productivities.
361 (384)
The main aim of a consumer is to maximise his satisfaction by spending a given sum of money on various goods which he wants to purchase.
362 (385)
(v) Measurement of National Income.
363 (385)
(vi) Distribution of National Income.
364 (385)
(ii) Money as a Basis of Adjustment.
365 (387)
Thus in order to measure the value of money, we have to find out the general price level.
366 (387)
PT = MV + M' V'
where P = price level, or 1/ P = the value of money;
M = the total quantity of legal tender money;
V = the velocity of circulation of M; M' = the total quantity of credit money;
V' = the velocity of circulation of M';
T = the total amount of goods and services exchanged for money or transactions performed by money.
367 (390)
According to Keynes, "The quantity theory of money is a truism."
368 (390)
3. Constants Relate to Different Time.
369 (391)
5. Weak Theory.
370 (391)
6. Neglects Interest Rate.
371 (392)
8. V not Constant.
372 (393)
concentrates on the supply of money and assumes the demand for money to be constant.
373 (393)
11. Static.
374 (393)
money. The demand for money is the demand to hold cash balances for transactions and precautionary motives.
375 (393)
the value of money is determined by the demand for cash balances.
376 (394)
Thus the price level or the value of money (the reciprocal of price level) is Pigou's Equation. Pigou was the first Cambridge economist to express the cash balances
377 (396)
Robertson's Equation.
378 (398)
2. Price Level does not Measure Purchasing Power.
379 (398)
3. More Importance to Total Deposits.
380 (398)
4. Neglects other Factors.
381 (399)
6. k and Y not Constant.
382 (399)
7. Fails to Explain Dynamic Behaviour of Prices.
383 (399)
8. Neglects Interest Rate.
384 (400)
9. Demand for Money not Interest Inelastic.
385 (400)
10. Neglect of Goods Market.
386 (400)
11. Neglects Real Balance Effect.
387 (400)
12. Elasticity of Demand for Money not Unity.
388 (400)
13. Neglects Speculative Demand for Money.
389 (401)
2. Similar Equations.
390 (430)
2. Flow and Stock.
391 (430)
3. V and k Different.
392 (403)
5. Nature of T.
393 (403)
6. Emphasis on Supply and Demand for Money. Fisher's approach emphasises the supply of money, whereas the Cambridge
394 (403)
7. Different in Nature.
395 (403)
2. Complete Theory.
396 (403)
3. Discards the Concept of Velocity of Circulation.
397 (403)
4. Related to the Short Period.
398 (403)
5. Simple Equations.
399 (403)
6. New Formulation in Monetary Theory.
400 (403)
7. Explains Trade Cycles.
401 (405)
9. Applicable under All Circumstances.
402 (405)
10. Based on Micro Factors.
403 (407)
This theory is based on the following assumptions:

    1. All factors of production are in perfectly elastic supply so long as there is any unemployment.
    2. All unemployed factors are homogeneous, perfectly divisible and interchangeable.
    3. There are constant returns to scale so that prices do not rise or fall as output increases.
    4. Effective demand and quantity of money change in the same proportion so long as there are any unemployed resources.
    404 (407)
    the Keynesian chain of causation between changes in the quantity of money and in prices is an indirect one through the rate of interest.
    405 (408)
    The Complicated Model. Keynes himself pointed out that the real world is so complicated that the simplifying assumptions upon which the reformulated quantity theory of money is based, will not hold.
    406 (409)
    (1) "Effective demand will not change in exact proportion to the quantity of money.
    (2) Since resources are homogenous, there will be diminishing, and not constant returns as employment gradually increases.
    (3) Since resources are not interchangeable, some commodities will reach a condition of inelastic supply while there are still unemployed resources available for the production of other commodities.
    (4) The wage-unit will tend to rise, before full employment has been reached.
    (5) The remunerations of factors entering into marginal cost will not all change in the same proportion."
    407 (412)
    Thus the Keynesian analysis is superior to the traditional analysis because it studies the relationship between quantity of money and prices both under unemployment and full employment situations.
    408 (413)
    2. Stable Demand for Money.
    409 (413)
    3. Nature of Money.
    410 (413)
    4. Effect of Money.
    411 (413)
    It was, therefore, wrong on the part of Keynes to argue that money had little effect on income. Money does affect national income.
    412 (415)
    Forms of Wealth.
    413 (415)
    2. Bonds
    414 (415)
    3. Equities
    415 (415)
    4. Physical goods or non-human goods
    416 (415)
    5. Human capital
    417 (419)
    Friedman has been criticised for using the broad definition of money
    418 (420)
    3. More Importance to Wealth Variables.
    419 (420)
    4. Money Supply not Exogenous.
    420 (421)
    6. Does not consider Time Factor.
    421 (421)
    7. No Positive Correlation between Money Supply and Money GNP.
    422 (421)
    First, Friedman uses a broader definition of money than that of Keynes in order to explain his demand for money function.
    423 (421)
    Second, Friedman postulates a demand for money function quite different from that of Keynes.
    424 (421)
    Third, there is also the difference between the monetary mechanisms
    425 (422)
    Fourth, there is the difference between the two approaches with regard to the motives for holding money balances. Keynes
    426 (422)
    Fifth, in his analysis, Friedman introduces permanent income
    427 (426)
    is an important determinant of the money supply.
    428 (427)
    central bank requires all commercial banks to hold reserves equal to a fixed percentage of both time and demand deposits. These are legal minimum or required reserves.
    429 (427)
    A commercial bank advances loans equal to its excess reserves which are an important component of the money supply. To determine the supply of money with a commercial bank, the central bank influences its reserves by adopting open market operations and discount rate policy.
    430 (428)
    4. High-Powered Money
    431 (428)
    5. Other Factors
    432 (429)
    (a) The marginal propensity to save
    433 (429)
    (b) Banks may also create more or less credit
    434 (429)
    (c) The velocity of circulation of money also affects
    435 (429)
    The use of high-powered money consists of the demand of commercial banks for the legal limit or required reserves
    436 (430)
    High-powered money (H) (or monetary base) consists of currency held by the public (C) plus required reserves (RR) and excess reserves (ER) of commercial banks. Thus high-powered money The relation between M and H can be expressed as the ratio
    437 (433)
    But the monetarists give more importance to excess reserves. According to them, due to uncertainties prevailing in banking operations as in business, banks always keep excess reserves. The amount of excess reserves depends upon the interaction of two types of costs: the cost of holding excess reserves, and the cost generated by deficiency in excess reserves.
    438 (435)
    RBI calls M3 as broad money. M4. The fourth measure of money supply is M4 which consists of M3 plus total post office deposits comprising time deposits and demand deposits as well. This is the broadest measure of money supply.
    439 (438)
    But how does a change in money supply affect liquidity ? A
    440 (439)
    monetary authority that influences money supply in the economy by following "easy" or "tight" monetary policy.
    441 (444)
    This view is also wrong becuase it is based on arguments relating to a single bank. As pointed out by Prof Samuelson, "The banking system as a whole can do what each small bank cannot do: it can expand its loans and investments many times the new reserves of cash created for it, even though each small bank is lending out only a fraction of its deposits."
    442 (446)
    where 1/ RRr, the reciprocal of the percentage reserve ratio, is called the deposit (or credit) expansion multiplier.
    443 (449)
    2. Proper securities.
    444 (449)
    3. Banking habits of the People.
    445 (449)
    will lead to the withdrawal of cash from the credit creation stream of the banking system. This reduces the power of banks to create credit to the desired level.
    446 (450)
    5. Excess Reserves.
    447 (450)
    6. Leakages.
    448 (450)
    7. Cheque Clearances.
    449 (450)
    9. Economic Climate.
    450 (450)
    10. Credit Control Policy of the Central Bank.
    451 (451)
    We may conclude that commercial banks do not possess unlimited powers to create credit.
    452 (452)
    central bank is that which is the lender of the last resort.
    453 (453)
    The central bank can restrict or expand the supply of cash according to the requirements of the economy. Thus it provides elasticity to the monetary system. By having a monopoly of note issue, the central bank also controls the banking system by being the ultimate source of cash. Last but not the least, by entrusting the monopoly of note issue to the central bank, the government is able to earn profits from printing notes whose cost is very low as compared with their face value.
    454 (454)
    Thus it is the custodian of government money and wealth. As
    455 (454)
    Commercial banks are required by law to keep reserves equal to a certain percentage of both time and demand desposits liabilities with the central bank. It is on the basis of these reserves that the central bank transfers funds from one bank to another to facilitate the clearing of cheques.
    456 (454)
    manages exchange control operations by supplying foreign currencies to importers and persons visiting foreign countries on business, studies, etc. in keeping with the rules laid down by the government.
    457 (456)
    The most important function of the central bank is to control the credit creation power of commercial bank in order to control inflationary and deflationary pressures within the economy.
    458 (458)
    6. To Have Growth with Stability.
    459 (458)
    Quantitative Methods.
    460 (458)
    Limitations of Bank Rate Policy
    461 (458)
    2. Wages, Costs and Prices not Elastic.
    462 (458)
    3. Banks do not approach Central Bank.
    463 (458)
    4. Bills of Exchange not Used.
    464 (460)
    6. Power to Control Deflation Limited.
    465 (460)
    7. Level of Bank Rate in relation to Market Rate.
    466 (460)
    8. Non-Discriminatory.
    467 (460)
    9. Not Successful in Controlling BOP Disequilibrium.
    468 (462)
    Thus open market operations have a direct influence on the market rates of interest also. Limitations of Open
    469 (462)
    2. Cash Reserve Ratio not Stable.
    470 (462)
    3. Penal Bank Rate.
    471 (463)
    5. Pessimistic or Optimistic Attitude.
    472 (463)
    6. Velocity of Credit Money not Constant.
    473 (466)
    4. Inflexible.
    474 (466)
    7. Other Factors.
    475 (466)
    8. Depressive Effect.
    476 (466)
    9. Rigid.
    477 (466)
    10. Not for Small Changes.
    478 (474)
    "directives" issued from time to time to the commercial banks to follow a particular policy which the central bank wants to enforce immediately.
    479 (475)
    2. No Specificity.
    480 (475)
    3. Difficult to distinguish between Essential and Non-essential Factors.
    481 (476)
    5. Discriminatory.
    482 (476)
    6. Malallocation of Resources.
    483 (476)
    7. Not Successful in Unit Banking.
    484 (477)
    The “monetarist revolution” refers to the new and important contributions made to monetary theory and policy by Prof. Friedman and his colleagues at the University of Chicago. It was a sort of revolution against the views of Keynesians who held the view that “money does not matter.”
    485 (477)
    monetarist revolution “only money matters” for three reasons: one, because the quantity of money is capable of being controlled fairly accurately by deliberate policy; two, because changes in the quantity of money can produce substantial changes in the flow of income, prices and other important variables; and three, because the relationships between stock of money and other assets are relatively stable and dependable.”
    486 (478)
    That link is the constant velocity of money.
    487 (478)
    Thus there will be inflation due to inappropriate increase in money supply. That is why the monetarists regard inflation as a purely monetary phenomenon.
    488 (480)
    Thus the economy is usually at or near the full employment level where there is no involuntary unemployment. Friedman refers to this as the natural rate of unemployment. This view is in marked contrast to the Keynesian view that there is always underemployment equilibrium in the economy and unemployment is involuntary.
    489 (481)
    For example, the rational expectationists deny the possibility of any inflation-unemployment trade-off even in the short run. Economists regard the above views of the monetarists as revolutionary. 1
    490 (481)
    1. Money Supply Endogenous
    491 (481)
    2. Demand for Money not Stable
    492 (481)
    3. Money Supply and GNP not Positively Correlated
    493 (482)
    5. Real World does not Approximate to a General Equilibrium System
    494 (482)
    6. Economy not Inherently Stable
    495 (484)
    In Fisher's "Equation of Exchnage", MV = PT
    496 (484)
    But people also hold money for other reasons, such as to earn interest and to provide against unforeseen events.
    497 (485)
    The Cambridge demand equation for money is Md = kPY
    498 (485)
    demand for money in an economy:( 1) the transactions demand, (2) the precautionary demand, and (3) the speculative demand.
    499 (486)
    transactions demand for money is a direct proportional and positive function of the level of income, and is expressed as
    LT = kY
    500 (490)
    function of both income and interest rates which can be expressed as LT = f (Y, r).
    501 (494)
    But at a very low rate of interest r2, the LS curve becomes perfectly elastic. This is know as the liquidity trap when people prefer to keep money in cash rather than invest in bonds and the speculative demand for money is infinitely elastic.
    502 (494)
    Thus the Keynesian speculative demand for money function is highly volatile, depending upon the behaviour of interest rates.
    503 (495)
    balances. This is the famous Keynesian liquidity trap. In this case, changes in the quantity of money have no effects at all on prices or income. ,,At a very low rate of interest, such as r2, in Figure 5, the Ls curve becomes perfectly elastic and the speculative demand for money is infinitely elastic. This portion of the Ls curve is known as the liquidity trap.
    504 (496)
    Further, according to Keynes, "a long-term rate of interest of 2 per cent leaves more to fear than to hope, and offers, at the same time, a running yield which is only sufficient to offset a very small measure of fear."
    505 (496)
    First, the monetary authority cannot influence the rate of interest even by following a cheap money policy.
    506 (496)
    497 8937: 20150515@ Secondthe rate of interest cannot fall to zero.
    507 (496)
    Third, the policy of a general wage cut cannot be efficacious in the face of a perfectly elastic liquidity preference curve,
    508 (496)
    LT = f (Y),
    509 (498)
    lateral summation of LT and LS curves : L = LT + LS.
    510 (503)
    Baumol's inventory theoretic approach to the transactions demand for money is an improvement over the classical and Keynesian approaches.
    511 (503)
    1. The cash balances quantity theory of money assumed the relationship between the transactions demand and the level of income as linear and proportional. Baumol has shown that this relationship is not accurate.
    512 (503)
    2. Baumol's theory also has the merit of demonstrating the interest elasticity of the transactions demand for money as against the Keynesian view that it is interest inelastic.
    513 (503)
    3. Baumol analyses the transactions demand for real balances thereby emphasising the absence of money illusion.
    514 (503)
    4. Baumol's inventory theoretic approach is superior to both the classical and Keynesian approaches because it integrates the transactions demand for money with the capital-theory approach by taking assets and their interest and non-interest costs into account.
    515 (503)
    5. Baumol's theory removes the dichotomy between transactions and speculative demand for money of the Keynesian approach.
    516 (503)
    James Tobin in his famous article "Liquidity Preference as Behaviour Towards Risk," 14 formulated the risk aversion theory of liquidity preference based on portfolio selection.
    517 (505)
    But the majority of investors belong to the third category. They are risk averters or diversifiers.
    518 (509)
    First, Tobin's theory does not depend on inelasticity of expectations of future interest rates, but proceeds from the assumption that the expected value of capital gain or loss from holding interest-bearing assets is always zero.
    519 (509)
    Second, this theory is superior to Keynes's theory in that it explains that individuals hold diversified portfolios of bonds and money rather than either bonds or money.
    520 (509)
    Third, like Keynes, Tobin regards the demand for money as closely dependent on interest rates and inversely related to interest rates and his theory provides a basis for liquidity preference.
    521 (509)
    Fourth, Tobin is more realistic than Keynes in not discussing the perfect elasticity of demand for money (the liquidity trap) at very low rates of interest.
    522 (509)
    Fifth, according to David Laidler, the real importance of the portfolio theory lies in "not what it tells directly about the aggregate economy,
    523 (510)
    theories of interest rate such as the classical, the loanable funds, the Keynesian, and the modern
    524 (510)
    Keynesian liquidity preference theory that determines the interest rate by the demand for and supply of money is a stock theory. It emphasises that the rate of interest is a purely monetary phenomenon.
    525 (511)
    marginal productivity of capital to him. It shows that at a higher rate of interest, the demand for capital is low and it is high at a lower rate of interest. Thus the demand for capital is inversely related to the rate of interest,
    526 (511)
    saving involves a sacrifice, abstinence or waiting when they forgo present consumption in order
    527 (512)
    (2) Saving-Investment Schedules not Independent.
    528 (512)
    (3) Neglects the Effects of Investment on Income.
    529 (513)
    But Keynes does not believe that investment depends on the rate of interest. It depends on the marginal efficiency of capital.
    530 (513)
    So, for each income level a separate saving curve will have to be drawn. This is all circular reasoning and offers no solution to the problem of interest. That is why Keynes characterised the classical theory of interest as indeterminate. (5) Neglects other
    531 (514)
    (6) Unrealistic Assumption of Full Employment.
    532 (514)
    (7} Neglects Monetary Factors.
    533 (514)
    (8) No Automatic Equality between Equilibrium and Market Rates of Interest.
    534 (514)
    Thus, Keynes dismisses the classical theory of interest as absolutely wrong and inadequate.
    535 (516)
    (2) Indeterminate Theory.
    536 (517)
    (4) Savings not Interest Elastic.
    537 (517)
    (5) Not correct to combine Real and Monetary Factors.
    538 (517)
    Despite these weaknesses, the loanable funds theory is better and more realistic than the classical theory on a number of counts.
    539 (519)
    demand for resources to invest with the readiness to abstain from consumption.
    540 (519)
    The rate of interest, in Keynes words, is the "premium which has to be offered to induce people to hold the wealth in some form other than hoarded money."
    541 (519)
    According to Keynes, there are three motives behind the desire of the people to hold liquid cash: (1) the transaction motive, (2) the precautionary motive, and (3) the speculative motive.
    542 (519)
    Transactions Motive. The transactions motive relates to "the need of cash for the current transactions of personal and business exchanges."
    543 (519)
    Precautionary Motive. The precautionary motive relates to "the desire to provide for contingencies requiring sudden expenditures and for unforeseen opportunities of advantageous purchases."
    544 (520)
    Keynes holds that the transactions and precautionary motives are relatively interest inelastic, but are highly income elastic.
    545 (520)
    A bond carries a fixed rate of interest. For instance, if a bond of the value of Rs 100 carries 4% interest and the market rate of interest rises to 8%, the value of this bond falls to Rs 50 in the market. If the market rate of interest falls to 2%, the
    546 (520)
    the liquidity trap. At a very low rate of interest, people prefer to keep money in cash rather than invest in bonds because purchasing bonds will mean a definite loss.
    547 (524)
    (3) Falls into Methodological Fallacy.
    548 (524)
    Thus the Keynesian theory falls into "methodological fallacy" by assuming a definite functional relationship between the quantity of money and the rate of interest.
    549 (524)
    (5) Inconsistent Theory.
    550 (526)
    "Without saving there can be no liquidity to surrender. The rate of interest is the return for saving without liquidity."
    551 (526)
    (8) Wrong Notion of Liquidity Trap.
    552 (526)
    (9) Ignores Real Factors. The greatest fallacy in Keynes's analysis is that he ignores the influence of real factors in determining the interest rate.
    553 (526)
    (11) Incomplete Theory.
    554 (527)
    It treats the interest rate as a purely monetary phenomenon and by neglecting the real factors makes the theory narrow and unrealistic.
    555 (527)
    (2) The liquidity preference theory is more realistic than the loanable funds theory because it is more akin to the behaviour of interest rate in the business world.
    556 (528)
    Hence the classical and the loanable funds theories of interest rate are indeterminate.
    557 (528)
    perfectly inelastic money supply curve QM is drawn on the assumption that the supply of money is fixed by the monetary authority.
    558 (528)
    the Kenesian theory simply relates different income levels to various interest rates, but does not show what the rate of interest will be. Hence it is an indeterminate theory.
    559 (528)
    The IS Curve
    560 (534)
    fall. This lower limit to which the rate of interest will fall is the Keynesian liquidity trap already explained above in Keynes's theory of interest.
    561 (536)
    Thus with a given LM curve, when the IS curve shifts to the right income increases and along with it the rate of interest also rises. Given the IS curve, when the LM curve shifts to the right, income increases but the rate of interest falls. The Hicks-Hansen analysis is thus an integrated and determinate theory of interest in which the two determinates, the IS and LM curves, based on productivity, thrift, liquidity preference and the supply of money, all play their parts in the determination of the rate of interest.
    562 (536)
    2. Interest Rate not Flexible.
    563 (536)
    3. Investment not Interest Elastic.
    564 (536)
    4. Highly Artificial.
    565 (536)
    5. Closed Model.
    566 (537)
    6. Price Level Exogenous Variable.
    567 (538)
    The Wicksell theory is based on. the following assumptions:
    1. There is full employment in the economy.
    2. Investment is a decreasing function of the rate of interest.
    3. Saving is an increasing function of the rate of interest.
      568 (538)
      depends on the expected profitability of new investment. All factors which affect the expected profitability of investment bring changes in the natural rate of interest.
      569 (541)
      Mrs Robinson regards the Wicksell Effect as "the key to the whole theory of capital accumulation."
      570 (545)
      3. Expectations and Uncertainty. Other
      571 (546)
      Its Assumptions
      572 (551)
      The Theory
      573 (555)
      3. Another reason of the superiority of segmented market theory over the expectations theory is that it does not explain the term structure of interest rates on the basis of the average of expected short-term interest rates.
      574 (555)
      4. As against the expectations theory, the segmented market theory does not explain a unique relation between short-term and long-term interest rates.
      575 (564)
      Don Patinkin in his monumental work Money, Interest and Prices
      576 (564)
      prices will have no effect on the demand and supply of goods.
      577 (565)
      With sufficiently large fall in wages and prices, the full employment level of output and income will be restored. Finally, even if there is the “liquidity trap”, the expansion of the money supply will increase money balances, and full employment can be restored through the operation of the real balanace effect.
      578 (568)
      The Pigou effect, also known as the wealth effect, was propounded by A.C. Pigou in 1943 to counter Keynes' argument that wage-price deflation cannot lead to automatic full employment.
      579 (575)
      Keynes was against wage-cutting and argued for increase in effective demand to remove unemployment. In this chapter, we discuss in detail the classical and Keynesian views on the relationship between wages and employment.
      580 (575)
      In a competitive economy when money wages are reduced, they lead to reduction in cost of production and consequently to the lower prices of products. When prices fall, demand for products will increase and sales will be pushed up. Increased sales will necessitate the employment of more labour and ultimately full employment will be attained.
      581 (578)
      Keynes did not accept the classical view that reduction in money wages led to full employment. He emphasised that unemployment could be removed by raising effective demand. His main objections to the classical view were as follows:
      582 (579)
      Keynes, when money wages are reduced in the economy, they will reduce money incomes of the workers who will reduce their demand for products.
      583 (579)
      Thus the main defect in the classical view was the failure to recognise the dual nature of wages as costs and incomes. The classicists only considered the cost aspect and neglected the income aspect.
      584 (579)
      3. Inverse Relation between Money and Real Wages.
      585 (579)
      This is because a fall in money wages will lead to a more than proportionate fall in prices.
      586 (579)
      relation between money wage and real wage, falls down and it is not possible to achieve full employment by reduction in money wages.
      587 (580)
      5. Cut in Real Wages via Increase in Prices.
      588 (580)
      6. Cut in Money Wages Impractical.
      589 (580)
      According to .Keynes, unemployment resulted from the lack of aggregate demand. It is demand that determines employment, and employment determines the real wage rate, not the other way round.
      590 (580)
      In order to establish this, Keynes brought out the distinction between money wages and real wages. Keynes pointed out that the relation between the two is inverse.
      591 (581)
      Keynes argued that workers are prepared to work at the current money wage rate, even if their real wage rates are lowered by increase in prices. This is because of the existence of “money illusion” in the labour market.
      592 (583)
      The main difference between the classical and Keynesian propositions about cut in real wages lies in that the classicists advocated cut in real wages through cut in money wages. They believed in the flexibility of money wages.
      593 (583)
      Keynes believed that money wages are not flexible, rather they are sticky downward.
      594 (584)
      The rich, on the other hand, have a high propensity to save and a low propensity to consume. This causes a decline in aggregate demand, income and employment. This is called Keynes's redistributive effect.
      595 (584)
      hThe owners of these fixed assets will feel themselves richer than before and their propensity to consume will be strengthened and the propensity to save weakened. This is known as the Pigou Effect which will tend to increase aggregate demand and employment.
      596 (585)
      No entrepreneur will be prepared to invest under such conditions.
      597 (586)
      Thus more money will be available for speculative motive and the rate of interest would fall.
      598 (586)
      This process of increase in investment and employment via reduction in wages and rate of interest is called the “Keynes Effect.”
      599 (586)
      The process of increase in investment and employment via reduction in money wages and interest rate is called the Keynes effect.
      600 (587)
      But Keynes did not believe that a policy of flexible wages and prices can lead to full employment. It can only lead to underemployment equilibrium.
      601 (589)
      IS curve cuts the LM2 curve in the liquidity trap.
      602 (589)
      The Keynes effect has been criticised by Hansen, Patinkin and other economists on the following grounds:
      603 (590)
      (b) Money Illusion.
      604 (590)
      (c) Price Level Expectations.
      605 (590)
      3. Investment not Insensitive to Interest Rate.
      606 (590)
      4. Adverse Effects of Wage-Price Deflation.
      607 (591)
      6. Wage-Price Deflationary Process Absurd.
      608 (592)
      Again, a gereral cut in money wages is bound to adversely affect the MEC, investment and employment in the economy.
      609 (592)
      Keynes did not favour a flexible wage policy in the form of a cut in money wages on certain practical grounds also.
      610 (592)
      Further, social justice requires that money wages of worker alone should not be cut.
      611 (1093)
      According to Keynes, "The economic system cannot be made self-adjusting along these lines."
      612 (1093)
      In other words, a policy of increasing the supply of money can lead to increase in employment by lowering the interest rate, like the policy of a cut in money wages. Such a policy is not only realistic but also involves far less social costs.
      613 (594)
      "Having regard to human nature and our institutions, it can only be a foolish person who would prefer a flexible wage policy to a flexible money policy, unless he can point to advantages from the former which are not obtainable from the latter."
      614 (594)
      615 (594)
      Keynes in his General Theory allayed all such fears. He did not believe like the neo-classicists that there was always full employment in the economy which resulted in hyper-inflation with increases in the quantity of money.
      616 (596)
      creeper, it is called creeping inflation. In terms of speed, a sustained rise in prices of annual increase of less than 3 per cent per annum is characterised as creeping inflation. Such an increase in prices is regarded safe and essential for economic growth.
      617 (597)
      3. Running Inflation.
      618 (597)
      4. Hyperinflation.
      619 (598)
      inflationary gap as an excess of planned expenditure over the available output at pre-inflation or base prices.
      620 (601)
      goods market as well as in the factor market.
      621 (603)
      takes place when aggregate demand is rising while the available supply of goods is becoming less.
      622 (603)
      “too much money chasing too few goods.”
      623 (603)
      Consequently, the amount of money spent did not affect the level of real output so that a doubling of the quantity of money would result simply in doubling the price level. Until prices had risen by this proportion, individuals and firms would have excess cash which they would spend, leading to rise in prices.
      624 (604)
      “inflation is always and everywhere a monetary phenomenon that arises from a more rapid expansion in the quantity of money than in total output.”
      625 (606)
      Keynes and his followers emphasise the incease in aggregate demand as the source of demand-pull inflation.
      626 (606)
      Thus the aggregate demand comprises consumption, investment and government expenditures. When the value of aggregate demand exceeds the value of aggregate supply at the full employment level, the inflationary gap arises.
      627 (607)
      The supply of some factors might become inelastic or others might be in short supply and non-substitutable. This would lead to increase in marginal costs and hence in prices.
      628 (613)
      Cost-push inflation is caused by wage increases enforced by unions and profit increases by employers.
      629 (613)
      The basic cause of cost-push inflation is the rise in money wages more rapidly than the productivity of labour. In advanced countries, trade unions are very powerful.
      630 (614)
      Cost-push inflation may be further aggravated by upward adjustment of wages to compensate for rise in the cost of living index.
      631 (615)
      impact on prices. Economists, therefore, do not give much importance to profit-push inflation as an explanation of cost-push
      632 (616)
      The cost-push theory has been criticised on three issues.
      633 (616)
      debate between demand-pull and cost-push inflation arises mainly from the difference between the policy recommendations on the two views. Recommendations on demand-pull inflation are related to monetary and fiscal measures which lead to a higher level of unemployment.
      634 (618)
      “The trouble is that we have no normal initial standard from which to measure, no price level which has always existed to which every one has adjusted.”
      635 (618)
      If prices increase first, it is a demand-pull inflation, and if wages increase follow, it is a cost-push inflation.
      636 (618)
      elements of both.
      637 (619)
      Suppose an inflationary process begins with excess demand with no cost-push forces at work. Excess demand will raise prices which will in due course pull up money wages. But the rise in money wages is not the result of cost-push forces. Such a mixed inflation will lead to sustained rise in prices.
      638 (621)
      The cost-push inflationary process will be self-sustaining only if every wage-push is accompanied by a corresponding increase in aggregate demand.
      639 (625)
      first the prices of agricultural goods, second, the general price level, and third, wages. Let us analyse them.
      640 (625)
      2. Wage Increases.
      641 (627)
      5. Money Supply.
      642 (628)
      The analysis is based on the assumption that both wages and prices are “administered”
      643 (629)
      Inflation is open when “markets for goods or factors of production are allowed to function freely, setting prices of goods and factors without normal interference by the authorities.”
      644 (630)
      The Phillips curve examines the relationship between the rate of unemployment and the rate of money wage changes.
      645 (633)
      646 (634)
      But there are certain variables which cause the Phillips curve to shift over time and the most important of them is the expected rate of inflation. So long as there is discrepancy between the expected rate and the actual rate of inflation,
      647 (634)
      expected rate of inflation.
      648 (634)
      Rather, it is determined by a number of structural characteristics of the labour and commodity markets within the economy. These may
      649 (634)
      imperfections.But what causes the Phillips curve to shift over time is the expected rate of inflation. This refers to the extent the labour correctly
      650 (636)
      In the long-run, the economy is bound to establish at the natural unemployment rate.
      651 (636)
      There is, therefore, no trade-off between unemployment and inflation except in the short run.
      652 (639)
      Conclusion. The vertical Phillips curve has been accepted by the majority of economists. They agree that at unemployment rate of about 4 per cent, the Phillips curve becomes vertical and the trade-off between unemployment and inflation disappears. It is impossible to reduce unemployment below this level because of market imperfections.
      653 (641)
      levels of unemployment. In other words, it provides a guideline to the authorities about the rate of inflation which can be tolerated with a given level of unemployment. For this purpose,
      654 (650)
      3. Increase in Public Expenditure.
      655 (650)
      4. Increase in Consumer Spending.
      656 (650)
      5. Cheap Monetary Policy.
      657 (650)
      7. Expansion of the Private Sector.
      658 (650)
      8. Black Money.
      659 (650)
      9. Repayment of Public Debt.
      660 (650)
      10. Increase in Exports.
      661 (651)
      2. Industrial Disputes.
      662 (651)
      3. Natural Calamities.
      663 (652)
      5. Increase in Exports.
      664 (652)
      6. Lop-sided Production.
      665 (652)
      7. Law of Diminishing Returns.
      666 (652)
      8. International Factors.
      667 (652)
      Monetary measures aim at reducing money incomes.
      668 (652)
      (b) Demonetisation of Currency.
      669 (653)
      (b) Increase in Taxes.
      670 (653)
      (d) Surplus Budgets.
      671 (655)
      (c) Price Control.
      672 (655)
      (d) Rationing.
      673 (655)
      Conclusion. From the various monetary, fiscal and other measures discussed above, it becomes clear that to control inflation, the government should adopt all measures simultaneously. Inflation is like a hydra-headed monster which should be fought by using all the weapons at the command of the government.
      674 (655)
      fixed income group and the flexible income group.
      675 (657)
      (2) Salaried Persons. Salaried workers such as clerks, teachers, and other white collar persons lose when there is inflation. The reason is that their salaries are slow to adjust when prices are rising.
      676 (657)
      (3) Wage Earners.
      677 (658)
      (5) Equity Holders or Investors.
      678 (658)
      (7) Agriculturists.
      679 (658)
      (8) Government.
      680 (659)
      Conclusion. Thus inflation redistributes income from wage earners and fixed income groups to profit recipients, and from creditors to debtors.
      681 (660)
      inflation adversely affects production
      682 (660)
      (2) Changes in the System of Transactions.
      683 (660)
      (3) Reduction in Production.
      684 (660)
      (4) Fall in Quality.
      685 (660)
      (5) Hoarding and Blackmarketing.
      686 (660)
      (7) Hinders Foreign Capital.
      687 (660)
      (8) Encourages Speculation.
      688 (661)
      (3) Exchange Rate.
      689 (661)
      (4) Collapse of the Monetary System.
      690 (661)
      (6) Political.
      691 (664)
      economic or social loss arising from the effects of inflation.
      692 (664)
      Individuals and business enterprises hold cash balances because they yield utility to them. At a higher rate of inflation, they find the purchasing power of the money balances diminishing.
      693 (664)
      The majority of economists also regard the redistributive effects of inflation as the cost of inflation.*
      694 (665)
      usually associated with falling activity and employment. As
      695 (666)
      deflation affects adversely the distribution of income and wealth. When
      696 (667)
      Keynes, “Inflation is unjust, deflation is inexpedient.
      697 (667)
      all the evils in a capitalist society, unemployment leading to poverty is the worst.
      698 (667)
      Inflation is unjust because it widens the gulf between the rich and the poor.
      699 (667)
      Thus it leads to inequalities of income and wealth.
      700 (667)
      creating shortages and hardships for the common man.
      701 (667)
      socially harmful. People are lured to amass wealth by unscrupulous means.
      702 (668)
      Keynes pointed out that, “it is not necessary that we weigh one evil against the other.
      703 (668)
      But deflation is a greater evil. Though it redistributes income in favour of the low income groups, yet it fails to benefit them because they are unemployed and have little income during deflation.
      704 (670)
      But the effectiveness of public expenditure primarily depends upon the public works programme, its importance in the economic system, the volume and nature of public works and their planning and timing.
      705 (670)
      706 (671)
      trade characterised by falling prices and high unemployment percentages.”
      707 (671)
      (2) The Long Jugler Cycle.
      708 (672)
      (4) Building Cycles.
      709 (672)
      (5) Kuznets Cycle.
      710 (672)
      Business cycles possess the following characteristics :
      711 (672)
      2. Fluctuations are recurrent in nature.
      712 (672)
      3. They are non-periodic or irregular. In other words, the peaks and
      713 (673)
      4. They occur in such aggregate variables as output, income, employment and prices.
      714 (673)
      5. These variables move at about the same time in the same direction but at different rates.
      715 (673)
      6. The durable goods industries experience relatively wide fluctuations in output and employment but relatively small fluctuations in prices.
      716 (673)
      7. Business cycles are not seasonal fluctuations such as upswings in retail trade during Diwali or Christmas.
      717 (673)
      8. They are not secular trends such as long-run growth or decline in economic activity.
      718 (673)
      9. Upswings and downswings are cumulative in their effects.
      719 (673)
      720 (678)
      3. Over-Investment.
      721 (678)
      5. Psychological Causes.
      722 (679)
      7. Marginal Efficiency of Capital (MEC). According to Keynes, the cycle consists primarily of fluctuations in the rate of investment.
      723 (680)
      To conclude with Samuelson, business cycles are caused both by external and internal factors. The economic system responds to fluctuations in external factors according to its internal factors, and vice versa.
      724 (680)
      Thus the rich become richer and the poor poorer.
      725 (683)
      (2) Money Supply cannot Continue a Boom or Delay a Depression.
      726 (684)
      (4) Traders do not React to changes in Interest Rates.
      727 (684)
      (5) Factors other than Interest Rate More Important.
      728 (684)
      (7) Does not Explain Periodicity of Cycle.
      729 (684)
      (8) Ignores Non-Monetary Factors.
      730 (686)
      (2) Unrealistic Assumption of Equilibrium.
      731 (686)
      (3) Interest Rate not the only Determinant.
      732 (687)
      (5) Investment does not fall with Increase in Consumer Goods.
      733 (687)
      6. Incomplete Theory.
      734 (688)
      Schumpeter assigns the role of an innovator not to the capitalist but to an entrepreneur. He does not provide funds but directs their use.
      735 (689)
      Thus Schumpeter's first approximation consists of a two-phase cycle. The economy starts at the equilibrium state, rises to a peak and then starts downward into a recession and continues till the new equilibrium is reached.
      736 (690)
      (2) Innovations not the Only Cause of Cycles.
      737 (690)
      (3) Bank Credit not the Only Source of Funds.
      738 (690)
      (4) Innovation financed through Voluntary Savings does not produce a Cycle.
      739 (691)
      prices. Since full employment is an exception rather than the rule. Thus Schumpeter's theory is not a correct explanation of trade cycles.
      740 (691)
      According to Pigou, expectations originate from some real factors such as good harvests, wars, natural calamities, industrial disputes, innovations, etc. But he attributes the causes of business cycle into two categories : (a) inpulses and (b) conditions. Impulses refer to those causes which set a process in motion.
      741 (696)
      (2) Divergent Cobweb.
      742 (697)
      The analysis of the cobweb theory is based upon very restrictive assumptions which make its applicability doubtful.
      743 (698)
      2. Output not Determined by Price.
      744 (698)
      3. Divergent Cobweb Impossible.
      745 (698)
      4. Continuous Cobweb Impractical.
      746 (699)
      The Keynesian theory of the trade cycle is an integral part of his theory of income, output and employment.
      747 (699)
      mainly due to "a cyclical change in the marginal efficiency of capital, though complicated and often aggravated by associated changes in the other significant short-period variables of the economic system."
      748 (699)
      "the cycle consists primarily of fluctuations in the rate of investment. And
      749 (700)
      must elapse before recovery begins, depends partly upon the magnitude of the normal rate of growth of the economy and partly upon the length of life of capital goods.
      750 (700)
      Keynes's theory of the trade cycle is superior to the earlier theories because "it is more than a theory of the business cycle in the sense that it offers a general explanation of the level of employment, quite independently of the cyclical nature of changes in employment."
      751 (701)
      (3) Explanation of Crisis Wrong.
      752 (701)
      (4) Incomplete Theory.
      753 (701)
      (5) Not Based on Empirical Data.
      754 (701)
      (6) One-Sided Theory.
      755 (701)
      Yt = Gt + Ct + It ...( 1)
      where Yt is national income Y at time t which is the sum of government expenditure Gt , consumption expenditure Ct and induced investment It.
      756 (701)
      Ct = aYt– 1 ...( 2)**
      It = ß( Ct– Ct– 1)
      757 (708)
      Hicks writes in this connection: “I shall follow Keynes in assuming that there is some point at which output becomes inelastic in response to an increase in effective demand.”
      758 (709)
      The Hicksian theory of the business cycle has been severely criticised
      759 (710)
      Duesenberry, Smithies and others
      760 (710)
      2. Value of Accelerator not Constant.
      761 (710)
      3. Autonomous Investment not Continuous.
      762 (711)
      5. Distinction Between Autonomous and Induced Investment not Feasible.
      763 (711)
      6. Ceiling Fails to Explain adequately the onset of Depression. Hicks has been criticised for his explanation of the ceiling or the upper
      764 (711)
      8. Full Employment level not Independent of Output Path.
      765 (712)
      10. Mechanical Explanation of Trade Cycle.
      766 (712)
      11. Contraction Phase not Longer than Expansion Phase.
      767 (712)
      But the actual behaviour of the postwar cycles has shown that the expansionary phase of the business cycle is much longer than the contractionary phase.
      768 (712)
      Despite these apparent weaknesses of the Hicksian model, it is superior to all the earlier theories in satisfactorily explaining the turning points of the business cycle.
      769 (718)
      the weaknesses of Goodwin's model.
      770 (719)
      (i) changes in economic activity have always been accompanied by changes in the money stock; (ii) there have not been major changes in the money stock that have not been accompanied by changes in economic activity; and (iii) changes in the stock of money have been attributed to a specific variety of exogenous factors rather than to changes in economic activity.
      771 (723)
      (3) Time Lag of Peaks and Troughs not Long and Variable.
      772 (723)
      Despite these criticisms, it cannot be denied that one of the important causes of business cycles is "a dance of the dollar."
      773 (728)
      Monetary policy as a method to control business fluctuations is operated by the central bank of a country.
      774 (728)
      boom, it raises its bank rate, sells securities in the open market, raises the reserve ratio, and adopts a number of selective credit control measures such as raising margin requirements and regulating consumer credit. Thus the central bank adopts a dear money policy.
      775 (728)
      To control a recession or depression, the central bank follows an easy or cheap monetary policy by
      776 (728)
      2. Fiscal Policy
      777 (729)
      government tries to reduce unnecessary expenditure
      778 (729)
      policy of having a surplus budget when the government revenues exceed expenditures.
      779 (729)
      borrow more from the public
      780 (730)
      Policy during Depression. During a depression, the government increases public expenditure, reduces taxes and adopts a budget deficit policy.
      781 (730)
      public works as roads, canals, dams, parks, schools, hospitals and other construction works.
      782 (730)
      Therefore, all methods should be used simultaneously.
      783 (732)
      investment. Firstly, it creates income, and secondly, it augments the productive capacity of the economy by increasing its capital stock.
      784 (734)
      fundamental equation of the model:
      785 (735)
      net autonomous investment (? I/ I) must be equal to as (the MPS times the productivity of capital).
      786 (736)
      The warranted rate of growth is, according to Harrod, the rate “at which producers will be content with what they are doing.”
      787 (738)
      is less than saving and that the aggregate demand falls short of aggregate supply. The result is fall in output, employment, and income. There would thus be chronic depression.
      788 (743)
      (3) The two models also fail to consider changes in the general price level.
      789 (743)
      (4) The assumption that there are no changes in interest rates is irrelevant to the analysis.
      790 (743)
      (5) The Harrod-Domar models ignore the effect of government programmes on economic growth.
      791 (743)
      (6) It also neglects the entrepreneurial behaviour which actually determines the warranted growth rate in the economy.
      792 (743)
      Despite these limitations, “Harrod-Domar growth models are purely laissez-faire ones based on the assumption of fiscal neutrality and designed to indicate conditions of progressive equilibrium for an advanced economy.”
      793 (758)
      The Solow-Swan neoclassical growth model explains the long-run growth rate of output based on two exogenous variables: the rate of population growth and the rate of technological progress
      794 (760)
      The Romer Model.
      795 (761)
      Romer takes investment in research technology as endogenous factor in terms of the acquisition of new knowledge by rational profit maximisation firms.
      796 (763)
      ,3. Romer's Model of Technological Change
      797 (763)
      In the Romer model, new knowledge enters into the production process in three ways. First, a new design is used in the intermediate goods sector for the production of a new intermediate input. Second, in the final sector, labour, human capital and available producer durables produce the final product. Third, and a new design increases the total stock of knowledge which increases the productivity of human capital employed in the research sector.
      798 (781)
      Macroeconomic policy is achieved through certain instruments and objectives. Its two main instruments are monetary and fiscal policy and its four major objectives are full employment, price stability, economic growth, and balance of payments equilibrium.
      799 (782)
      For instance, the government may have the following policy objectives : (1) to achieve full employment at the rate of 3 per cent unemployment; (2) to achieve price stability at an annual inflation rate of 5 per cent per annum; and (3) to attain the growth rate of 5 per cent per annum for the economy. Thus the policy targets of the government are 3 per cent unemployment rate, 5 per cent inflation rate and 5 per cent growth rate per year. On the other hand, policy instruments are those exogenous variables that can be directly influenced by the government.
      800 (782)
      Full employment has been ranked among the foremost objectives of economic policy.
      801 (782)
      According to Pigou, the tendency of the economic system was to automatically provide full employment in the labour market.
      802 (783)
      However, this classical view on full employment is consistent with some amount of frictional, voluntary, seasonal or structural unemployment.
      803 (783)
      Thus the problem of full employment is one of maintaining adequate effective demand.
      804 (784)
      Thus the Keynesian concept of full employment involves three conditions: (i) reduction in the real wage rate; (ii) increase in effective demand; and (iii) inelastic supply of outut at the level of full employment.
      805 (784)
      frictional unemployment of 3% in a full employment situation for England.
      806 (785)
      Differential price changes are essential for allocating resources in the market economy.
      807 (786)
      Generally, economists believe in the possiblity of continual growth.
      808 (786)
      The economy may not grow further if there is no improvement in the quality of labour in keeping with the new technologies.
      809 (787)
      Another objective of macroeconomic policy since the 1950s has been to maintain equilibrium in the balance of payments.
      810 (788)
      What is the balance of payment target of a country ?
      811 (788)
      A deficit in the balance of payments of a country can be wiped out with restrictive monetary and fiscal policies, by reducing imports and encouraging exports, and by devaluation of the currency.
      812 (789)
      Thus unskilled workers are the worst sufferers because they are thrown out of jobs with automation.
      813 (790)
      Full Employment and Price Stability
      814 (790)
      Economists do not find any conflict between unemployment and price stability.
      815 (791)
      Price Stability and Balance of Payments
      816 (793)
      Obviously, points to the right and above the IB curve relate to inflation or over full employment, and points to the left and below the curve refer to recession or unemployment.
      817 (793)
      points above the EB curve refer to a surplus and points below the curve relate to a deficit in the balance of payments.
      818 (795)
      Tinbergen Principle which leads to the assignment problem. The solution to this problem has been suggested by Mundell which we discuss below in detail.
      819 (795)
      If there are more objectives than policy instruments it means that there are not enough tools to achieve the policy objectives. The system is undetermined.
      820 (795)
      Thus the number of policy tools must equal the number of targets for economic policy to be successful. This has come to be known as the Tinbergen Principle or the fixed targets approach.
      821 (799)
      2. Ignores Stagflation.
      822 (799)
      3. Neglects Other Factors.
      823 (799)
      4. Practical Constraints.
      824 (800)
      6. Not a True Adjustment Mechanism.
      825 (800)
      7. Debt-Servicing Requirements not Considered.
      826 (800)
      8. Retards Capital Formation.
      827 (801)
      10. Long Time Lags.
      828 (801)
      According to Keynesians, the economy is subject to many exogenous shocks from factors like changes in expectations, political events, international events such as oil crisis, war, etc.
      829 (801)
      Therefore, Keynesians argue that government should follow activist fiscal and monetary policies to stabilise the economy.
      830 (801)
      To Keynesians, stabilisation policy means “leaning against the prevailing economic wind.”
      831 (805)
      Friedman distinguishes among three basic lags: the recognition lag, the administrative lag, and the operation lag. These lags are explained as under:
      832 (805)
      Empirical evidence in the U.S. suggests that in the past the Federal Reserve Bank recognised the need for monetary action only three months after the trough in a business cycle and about six months after a boom had started. Thus the recognition lag has been longer at the peaks than at the troughs.
      833 (806)
      Countercyclical policy means “leaning against the prevailing economic winds”. It implies that the authorities follow an easy policy in a recession and a tight policy in a boom.
      834 (806)
      According to Friedman, “We seldom in fact know which way the economic wind is blowing until several months after the event.”
      835 (807)
      Friedman, therefore, calls for an end to discretion in policy. In place of the judgement of monetary and fiscal authorities, he proposes that it should follow a fixed long-run rule, that is to increase the money supply and fiscal deficit at an annual fixed percentage rate regardless of current economic conditions.
      836 (808)
      The Keynesians also do not concur with Friedman’s policy prescription to avoid the lag problems. They favour the use of monetary policy to control a boom, and supplementing monetary policy with fiscal policy to control a recession.
      837 (809)
      838 (809)
      Objectives or Goals of Monetary Policy
      839 (809)
      2. Price Stability
      840 (809)
      3. Economic Growth
      841 (809)
      4. Balance of Payments
      842 (811)
      Changes in Reserve Ratios.
      843 (811)
      Selective Credit Controls.
      844 (814)
      1. Increase in the Velocity of Money.
      845 (816)
      (c) Methods to Make Better Use of Available Money Supply.
      846 (817)
      3. Threat to Credit Market.
      847 (817)
      4. Threatens Solvency of NBFIs.
      848 (817)
      5. Alter Expectations of Borrowers and Lenders. A very tight monetary policy may alter the expectations of borrowers
      849 (818)
      Keynes did not agree with the classical view that the supply of money influences the price level directly and that the economy always stays at the full employment level. Moreover, the classical analysis was related to the long-run where market forces worked the economy toward full employment.
      850 (819)
      contends that a change in the supply of money can permanently change such variables as the rate of interest, the aggregate demand, and the level of employment, output and income.
      851 (819)
      Keynes believed in the existence of unemployment equilibrium.
      852 (819)
      In a situation of unemployment, Keynes advocated cheap money policy.
      853 (820)
      the rate of interest, the lower the demand for money, and vice versa. This negative relationship between the demand for money and the rate of interest provides a link between changes in the supply of money and the level of economic activity.
      854 (820)
      He argued that at a very low interest rate, the demand for money curve becomes perfectly elastic.
      855 (820)
      This is the liquidity trap portion of the demand for money curve which is completely flat. This means that further increases in the supply of money by the monetary authority cannot reduce the rate of interest. This implies that there will be no effect on investment and income, and monetary policy does not influence economic activity.
      856 (820)
      “If we are tempted to assert that money is the drink which stimulates the system of activity, we must remind ourselves that there may be several steps between the cup and the lip.”
      857 (821)
      Recent researches have shown that Keynes was misrepresented by his followers in attributing that he was not a votary of monetary policy.
      858 (822)
      Thus the “neo-Keynesians contend that financial assets are the closest substitutes for money, and that, consequently, increases in the supply of money will have their effect eventually on the level of economic activity by bringing about increases in the output of capital goods industries.”
      859 (822)
      The monetarists led by Friedman are of the view that excess money balances will be used to purchase not only financial assets but also real assets such as houses, land, consumer durables, etc.
      860 (824)
      Broadly speaking, liquidity means moneyness. Liquidity is characterised by the ease of converting an asset into money at little cost. A liquid asset is one which is easily spendable, marketable (transferable) and has capital certainty.
      861 (825)
      Thus it held the view that “changes in rates of interest only very exceptionally have direct effects on the level of demand.”
      862 (830)
      Though the ultimate aim of fiscal policy is the long-run stabilisation of the economy, yet it can be achieved by moderating short-run economic fluctuations. In this context, Otto Eckstein defines fiscal policy as "changes in taxes and expenditures which aim at short-run goals of full employment and price-level stability."
      863 (831)
      fiscal policy has two approaches: (1) built-in stabilisers; and (2) discretionary fiscal policy.
      864 (831)
      changes in the budget are automatic and hence this technique is also known as one of automatic stabilisation. The various automatic stabilisers are corporate profits tax, income tax, excise taxes, old age, survivors and unemployment insurance and unemployment relief payments.
      865 (832)
      Built-in stabilisers have certain advantages as a fiscal device. They are: 1. The built-in stabilisers serve as a cushion for private purchasing power when it falls and lessen the hardships on the people during deflationary period. 2. They prevent national income and consumption spending from falling at a low level. 3. There are automatic budgetary changes in this device and the delay in taking administrative decisions is avoided. 4. Automatic stabilisers minimise the errors of wrong forecasting and timing of fiscal measures. 5. They integrate short-run and long-run fiscal policies.
      866 (833)
      This policy has the following limitations: 1. The discretionary fiscal policy depends upon proper timing and accurate forecasting.
      867 (835)
      Deficit budgeting is an important method of overcoming depression
      868 (835)
      Budget deficit may also be secured by reduction in taxes and without government spending.
      869 (841)
      But the total expenditure remains unchanged and fiscal policy has no expansionary effect on national income.
      870 (846)
      Monetarism refers to the followers of Milton Friedman who hold that " only money matters", and as such monetary policy is a more potent instrument than fiscal policy in economic stabilisation. On the other hand, Keynesianism refers to the followers of Keynes who believe that "money does not matter,"
      871 (848)
      Friedman's historical findings show a " stable money demand function" which implies that the demand for money is a stable function of peoples' income.
      872 (849)
      The Keynesian View The Keynesians hold just the opposite views to monetarists about the demand for and supply of money and the aggregate expenditure. Both the demand for and supply of money are highly interest elastic while the aggregate expenditure is not.
      873 (851)
      Thus so long as there is unemployment, output will change in the same proportion as the quantity of money, and there will be no change in prices; and when there is full employment , prices will change in the same proportion as the quantity of money.
      874 (851)
      According to the monetarists, monetary policy has a greater influence on economic activity than fiscal policy, and fiscal policy is important only in making changes in the money supply. On the other hand, the Keynesians emphasise the importance of both fiscal and monetary policy
      875 (912)
      From the late 1960s to 1970s, a new phenomenon appeared in the form of both high unemployment and inflation, known as stagflation. This phenomenon of stagflation posed a serious challenge to economists and policy makers because the Keynesian theory was silent about it. Out of this crisis emerged a new macroeconomic theory which is called the Rational Expectations Hypothesis (Ratex).
      876 (914)
      Muth pointed out that certain expectations are rational in the sense that expectations and events differ only by a random forecast error.
      877 (917)
      The Ratex hypothesis assumes that people have all the relevant information of the economic variables. Any discrepancy between the actual rate of inflation and the expected rate is only in the nature of a random crror.
      878 (919)
      Thus for expansionary fiscal and monetary policies to have an impact on unemployment in the short-run, the government must be able to fool the people . But it is unlikely to happen all the time. If the government continues to persist with such policies, they become ineffective because people cannot be fooled for long and they anticipate their effects on production and unemployment.
      879 (924)
      Thus supply-side economists advocate reduction in tax rates in order to increase the incentives to work, save and invest and to get more tax revenue by the government. Increase
      880 (929)
      The Keynesians advocate demand management policies both fiscal and monetary to stabilise the economy. They favour active interventionist fiscal and monetary policies. They do not regard the two policies as competitive but complementary to each other.
      881 (929)
      In contrast , monetarist hold that the economy is basically stable and when disturbed by some change in basic conditions will quickly revert to its long- run growth path.
      882 (930)
      The new classical macroeconomics is based on the following principles or hypotheses: (1) Markets Continuously Clear (2) Rational Expectations (3) Aggregate Supply Hypothesis
      883 (934)
      This behaviour of workers to substitute current leisure for future leisure and vice versa is known as intertemporal substitution.
      884 (952)
      1. New classical economists argued that Keynesian economics was theoretically inadequate because it was not based on microeconomic foundations. According to them, macroeconomic models should be based on firm microeconomic foundations.
      885 (953)
      But in new Keynesian models, wages and prices fail to adjust rapidly enough to clear markets within a short time so as to keep the quantity demanded of labour equal to its quantity supplied. But this is an unemployment equilibrium.
      886 (969)
      Blanchard comments that new Keynesian economics has led to the construction of "too many monsters with few interesting results."
      887 (971)
      "Far from being a set of facts looking for a theory, the new Keynesian paradigm suffers from too many unrelated theoretical explanations." Robert Gordon. In the light of this statement,
      888 (971)
      889 (972)
      But in balance of payments accounting, the practice is to show credits on the left side and debits on the right side of the balance sheet.
      890 (995)
      Given these assumptions, when a country devalues its currency, the domestic prices of its imports are raised and the foreign prices of its exports are reduced. Thus devaluation helps to improve BOP deficit of a country by increasing its exports and reducing its imports.
      891 (995)
      Marshall-Lerner condition states: when the sum of price elasticities of demand for exports and imports in absolute terms is greater than unity, devaluation will improve the country’s balance of payments, i.e. ex + em > 1 where ex is the demand elasticity of exports and Em is the demand elasticity for imports.
      892 (1032)
      Jan Tinbergen 6 was the first economist to lay down that the number of policy instruments must be equal to the number of objectives. If there are more objectives than policy instruments it means that there are not enough tools to achieve the policy objectives.
      893 (1033)
      Robert Mundell by the Principle of Effective Market Classification.
      894 (1042)
      commercial controls which operate on the goods side of transactions by preventing people from buying certain goods or forcing them to buy others, or providing financial incentives like tariff subsidies, etc. for certain kinds of sales or purchases.
      895 (1042)
      But direct controls involve large social costs. They lead to welfare losses when people are prevented from using foreign exchange and import goods.They also involve large administrative costs.
      896 (1056)
      59. No Free Trade.
      897 (1056)
      Such trade restrictions are tariff, import quotas, customs duties and various exchange control devices which tend to reduce the volume of imports. These, in turn, cause wide deviations between the actual exchange rate and the exchange rate set by the purchasing power parity.

Sanasto Vocabulary Словарь (Code: w)

1 1 (1092)
,Jhingan: Macroeconomic Theory
2 term 'macro' was first used in economics by Ragner Frisch in 1933 (16)
3 In common parlance (37)
4 abode:a·bode 1 n (371)
FORMAL or POETIC/LITERARY a place of residence; a house or home: her current abode | HUMOROUS my humble abode. - residence: a place of abode. - ARCHAIC a stay; a sojourn. Middle English (in the sense 'act of waiting'): verbal noun from ABIDE.
5 bottleneck inflation or “semi-inflation” (594)
6 runaway or galloping inflation (597)
7 proft-push inflation (614)
Oligopolist and monopolist firms raise the prices
8 administered-price theory of inflation or price-push inflation or sellers’ inflation or market-power inflation (614)
9 natural rate of unemployment (634)
10 inflationary recession (645)
11 Sometimes, deflation is confused with disinflation (665)
12 shirk v (963)
[with obj.] avoid or neglect (a duty or responsibility): I do not shirk any responsibility in this matter. ¦ n. ARCHAIC a person who shirks. shirker n. mid 17th century (in the sense ‘practise fraud or trickery’): from obsolete shirk ‘sponger’, perhaps from German Schurke ‘scoundrel’. - pakolla

Yhteenvedot Reviews Резюме (Code: ###)

M.L. Jhingan: Macroeconomic Theory
1,19656,1092,eco,eng,20150514,20150728,4,M.L. Jhingan: Macroeconomic Theory
20150514-20150728, 1092 pages, 4* SalesInfo o eng

eng Jhingan: Macroeconomics

M.L. Jhingan: Macroeconomic Theory - e-mail : vrinda@ ndf.vsnl.net.in

This is a tremendous book. Having read it all through I would consider the reading a real feat, if I were a student of exonomics. But being a retired teacher of economics I find reading of this book a privilege, a great privilege, which I would gladly grant to all my colleagues being deeply grateful for it to the author M.L. Jhingan.

Thanks to the author's perseverance in carefully designed and throughout observed classification of all material reading and recognition of any subject is smooth and pleasant. Systematic usage of headings up to the fifth or sixth level makes it easy to find anything, familiar or new material.

With satisfaction do I find properly emphasizes the really great authorities as well as my personal favourites, such as the thunder-mighty founder of the whole discipline Adam Smith, then the grand old man of the science as a powerful tool John Maynard Keynes, both having their heavy word to say even in the present day situation, although with completely new challenges of the modern information technology. I have in mind the awesome advance of automation and simplification of personal participation, but going on just like in the famous pin producing example of Adam Smith.

With similar satisfaction do I note lines dedicated to the effective teacher of myself and all of my generation, Paul A. Samuelson, according to whose Economics textbook even I have structured my own, written soon 50 years ago. Further great names of those days as well as still present are Schumpeter, Hicks, whom the latter I have the honour to have even met at an occasion, ...

But from my point of view, there are, in my opinion, also some underemphasized authors and a whole field of discipline, which is econometrics. My personal tutor in the art of building and especially solving a macroeconomic econometric model L.R. Klein is mentioned and referred to in a couple of occasion for his fine work about the Keynesian revolution. Also the Dutch Jan Tinbergen. But in my opinion, the significance of econometric models as guidelines in forecasting and formulation of economic policy could be more emphasizes as the practical implementations of all the rich theories presented in this great volume.

But to use one of the author's favourite starts in appreciation of versatility of views: 'Despite these limitations...' or 'Despite these criticisms... I full-heatedly recommend this book to any and all teachers of economics as a treasury and reliable source for spreading the knowledge of economics. All five stars with an emphasizes enthusiasm.


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