MacroEco Assignment Group14-15 H2

8/8/2019 MacroEco Assignment Group14-15 H2

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AGGREGATE DEMAND

Aggregate demand (AD) The total demand for final goods and services in the economy (Y) at a given

time and price level.

An aggregate demand curve The sum of individual demand curves for different sectors of the economy.

The aggregate demand is usually described as a linear sum of four separabledemand sources.

AD = C+ I + G + (X-M)

C consumption (may also be known as consumer spending)

I Investment,


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AGGREGATE SUPPLY

Aggregate supply The total supply of goods and

services that firms in a national

economy plan on selling during aspecific time period. It is the totalamount of goods and services thatfirms are willing to sell at a given price

level in an economy.Aggregate supply curve The analogous to the supply curve,

a theoretical graph showing theaggregate supply at different price


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AGGREGATE DEMAND ANDSUPPLY THE DIFFERING

PERSPECTIVES

CLASSICAL KEYNESIAN

They believe in laissez fairecapitalism and endorse that leftto itself, the economy will find

its own full employmentequilibrium.

They argue that labour marketdoes not work perfectly

Unemployment (a surplus oflabour) wages fall morelabour is employed full-employment is restored.

Sticky downwardsAny unemployment may not lead to wagesfalling. This in turn means that theunemployed do not get re-employed.

An automatic process and hence

government need not intervene.

Government should intervene to

boost demand.

In the short run theyacknowledge that the AS curvewill be upward sloping becauseof diminishing returns, but any

reflationary policy will still bestokin u inflation for the

They argue that the long run and short runAS curves will be the same and that toreduce unemployment, the government mustuse reflationary policies to boost the level ofdemand.


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AGGREGATE DEMAND ANDSUPPLY THE DIFFERENT

VIEWPOINTS

CLASSICAL KEYNESIAN


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How aggregate supply and aggregatedemand explain macro-economic

behaviour ? Aggregate demand curve shows the quantity of allgoods and services that households, firms, thegovernment and customers abroad want to buy foreach price level.

Aggregate supply shows the quantity of goods and

services that firms produce and sell at each pricelevel.

According to the Aggregate demand and supplymodel, the price level and the quantity of outputadjust to bring aggregate demand and supply intobalance and the factors involved in bringing theminto balance define macro economic behaviour.


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Aggregate Demand

Aggregate demand is plotted with price on Y axisand quantity of output on X axis.

As price increases, the quantity demanded falls

and as price level falls, real wealth rises, interestrates fall and exchange rates depreciate.

It slopes down from left to right because itseffected by GDP and all four factors that impact

GDP, namely Consumption, Investment,Government Purchases and Net Exports.


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Aggregate Demand Curve

AD

Y1Y2

Quantity of Output

Pr

ice

Le

ve

l

:Factors affecting the slope.1 The Wealth Effect.2 -The Interest Rate effect.3 -The Exchange Rate Effect


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Aggregate Demand curve shift

AD

Y1

AD2

Y2

Pr

ice

Le

ve

l

Quantity of Output

Factors affecting the curve:shift

.1 Changes in consumption

.2 Changes in Investment

.3 Changes in Governmentpurchases


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Aggregate Supply Curve

, In the long run an economy s production of goods and services,depends on its supplies of labor capital and natural resources

and on the available technology used to turn these factors of.production into goods and services

The quantity supplied does not depend on the overall price, - level the long run aggregate supply curve is vertical at the.natural rate of output

Pr

ice

Le

ve

l

Quantity of Output

Natural rate ofoutput

Long Run AggregateSupply

Factors affecting AScurve Change in labor Change in capital

Change in naturalresources Change in technologicalknowledge


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Objective of Indian Monetary Policy Regulation of Supply of Money and Cost and Availability

of credit in the Economy

Maintain price stability, ensure adequate flow of credit

to the productive sectors of the economy and overalleconomic growth

Stability for the national currency

Growth in employment and income


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Monetary Policy RBIs Role

Demand For Money /Demand For Goods Services

,Instrument such as CRR OMO and Bank Rate

,y supply velocity of circulation of money during inflationControl on bank credit when price ris

Ensuring price stability and ensuring sa


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Tools used by RBI to achieve the objective

OMO (Open Market Operations) : Purchase and sell ofsecurities in the open market.

CRR (Cash Reserve Ratio) : Amount of money that Bankmust set aside with RBI against their deposits.

Repo Rate : Rate at which RBI lends to other Bank againstgovernment securities.

Reverse Repo Rate : Rate at which RBI borrows from otherBanks.

SLR (Statutory Liquidity Ratio) : The minimum percentage

of deposits that the bank has to maintain in form of gold,cash or other approved securities. Thus, we can say that itis ratio of cash and some other approved to liabilities(deposits)

Bank Rate: Minimum rate at which central bank providesloan to commercial banks.


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RBIs last Monetary Policy and Liquidity

Management Measures on 2nd July

Increase the repo rate under the Liquidity AdjustmentFacility (LAF) by 25 basis points from 5.25 per cent to 5.50

per cent

Increase the reverse repo rate under the LAF by 25 basispoints from 3.75 per cent to 4.0 per cent

The additional liquidity support to scheduled commercialbanks under the LAF to the extent of up to 0.5 per cent oftheir net demand and time liabilities (NDTL) currently set toexpire on July 2, 2010 is extended up to July 16, 2010.

The second LAF (SLAF) will be conducted on a daily basis up


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Rationale for this step ahead of the

scheduled 1st quarterly review on 22nd July Significant macroeconomic developments since the April

2010 Monetary Policy Statement

Data for real GDP growth and WPI inflation became available

by mid-June 2010 Liquidity pressures triggered by sudden build-up in government

cash balances occasioned by the larger than anticipated levelof 3G spectrum auction

At the global level, the recovery is strengthening. Though,outlook continues to be clouded by uncertainty in the Euroarea.

On domestic level, revised growth estimates by CSOsuggest that the recovery is consolidating.

The manufacturing sector has recorded robust growth inrecent months, aided among others, by expanding exports

Sharp upturn in the capital goods sector, acceleration in


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Predicting the forthcoming credit policy ofIndia

Nothing seems to change much since 2nd Julyexcept rising Inflation which seems to be themajor concern now.

Overall WPI inflation increased to 10.2 in May

2010, up from 9.6 per cent in April 2010 Food price inflation and consumer price inflation

remain at elevated levels.

The prices of non-food manufactured goods andfuel items have accelerated.

Present The prices of non-food manufacturedgoods and fuel items have accelerated in recentmonths.

Recent data suggest that the upside bias for a

more than 8% GDP growth rate has materialized


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Predicting the forthcoming credit policy ofIndia contd.

Considering all this we can expect the RBI toincrease the Repo Rate and Reverse Repo Rate by.25 bias points ( some economist even suggest a

higher increase to check inflation) and keep theCRR untouched as there is still temporary crunchof liquidity because of 3G auction.

Present Rate

Estimated increaseCRR 6.0

Unchanged (6.0)Repo Rate 5.5

+.25 (5.75)

MacroEco Assignment Group14-15 H2

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