5757 S.Y.B.A. ECONOMICS PAPER - II MACRO ECONOMICS . © UNIVERSITY OF MUMBAI Dr. Devanand Shinde Vice Chancellor Incharge Universityof Mumbai, Mumbai Dr. Dhaneswar Harichandan Anil R. Bankar Director Incharge, Associate Prof. of History & Asst. Director & Institure of Distance & Open Learning, Incharge StudyMaterial Section, Universityof Mumbai, Mumbai IDOL, University of Mumbai Programme & Course : Ms. Rajashri Pandit Co-ordinator& Editor Asst. Prof-cum-Asst. Director, IDOL, University of Mumbai, Mumbai-400 098 Course Writer : V.S. Sontakke Kirti College, Dadar (W), Mumbai - 400028 : Nilesh Mhatre Saket College of Arts, Science & Commerce, Kalyan (E), - 421306 : Vilas Gaikar Department of Economics Chandibai Himathlal Mansukhani College, Ulhasnagar, Dist. Thane - 421003 Reprint January, 2018 S .Y.B.A E.conomics Paper II, Macro Economics Published by : Director Incharge Institute of Distance and Open Learning , Universityof Mumbai, Vidyanagari, Mumbai - 400 098. DTP Composed : Ashwini Arts Gurukripa Chawl, M.C. Chagla Marg, Bamanwada, Vile Parle (E), Mumbai - 400 099. Printed by : Ground Floor, Sitaram Mill Compound, J.R. Boricha Marg, Mumbai - 400 011 . CONTENTS Unit No. Title Page No. Module 1 Introduction 1 Meaing and Scope Macro Economics. 1 2. Concepts of National Income Aggregates. 8 3. Trade Cycles. 33 Module 2 4. Consumption, Investment and Employment 43 5. Investment and the Principle of Acceleration 63 Module 3 Money and Inflation 6. Money and Inflation 77 7. Demand for Money 101 8. Inflation. 120 Module 4 Banking in India 9. Commercial Banking 139 10.Central Bank 161 Module 5 Financial Markets 11. Finacial Markets 183 12. Capital Markets 198 Module 6 Public Finance 13. Public Finance 221 14. Public Revenue 227 15. Public Expenditure and Public Debt 243 . I S.Y.B.A ECONOMIC PAPER - II MACRO ECONOMICS Module 1 : Introduction: Meaning and scope of Macro Economics - Concepts of National Income aggregates: GNP, NNP, GDP, NDP, Per Capita Income, Personal Income and Disposal Income - Methods and difficulties in Measurement of National Income - Circular flow of Income : closed (Two and Three sector Models) open economy models - Trade cycles : Features and phases Module 2 : Consumption, Investment and Employment Say’s law of market - Theory of Effective demand – Consumption function - Investment function – Marginal Efficiency of Capital and rate of interest - Investment multiplier and Accelerator. Module 3: Money and inflation Meaning and function of Money - Supply of money: Constituents – Determinants of money supply. Velocity of circulation of money - RBI’s approach to measurement of money supply (Liquidity measures). Demand for Money: Classical - Neo-classical - Keynesian- Friedman’s approaches. Inflation: Types – Causes – Effects – Measures to control inflation. Module 4: Banking in India Commercial Banks: Functions - Multiple Credit Creation Process and its limitations - Performance of commercial banks since 1991. Central Bank: Functions of RBI – Monetary policy: Objectives and Instruments – Narsimham Committee Report of 1998. Module 5: Financial Markets Money Market: Components – Instruments - Features of Indian Money market. Money market reforms in India since 1991. Capital market: Role of capital market in economic development, Structure of capital market in India (Primary and Secondary markets), Mutual funds. Securities and Exchange Board of India (SEBI). Module 6 : Public Finance: Nature and Scope of Public Finance - Sources of Public Revenue – Canons of taxation – Merits and demerits of direct and indirect taxes. Public Expenditure: Classification – Causes of growing public expenditure. Public debt: Types, Burdens of internal and external public debt – Concepts of deficit. II REFERENCES: 1. Ahuja H.L. (2008), Macroeconomics Theory & Policy, S. Chand & Company Ltd., Ram Nagar, New Delhi. 2. Dwivedi D.N. (2007), Macroeconomics Theory & Policy, Tata McGraw-Hill Publication Company Ltd., Delhi. 3. DattR.&K.P.M.Sundaram(2010),IndianEconomy,S. Chand & Company Ltd., New Delhi. 4. Gupta S.B. (1994), Monetary Economics, S. Chand & Company, Delhi. 5. Gupta S.G. (2001), Macroeconomics Theory & Applications, Tata McGraw-Hill Publication Company Ltd., Delhi. 6. N. Gregory Mankiw (2005), Macroeconomics, Worth Publisher, 41, Madison Avenue, New York. 7. McConnel, C. R. & H. C. Gupta (1984), Introduction to Macro Economics, Tata McGra-Hill Publishing company Ltd., New Delhi. 8. Misra, S. K. & V. K. Puri (2010), Indian Economy: Its Development Experience, Himalaya Publishing House, Mumbai. 9. Stonier A.W. & D.C. Hague (2004), Textbook of Economic Theory, Pearson Education, Delhi. 10. Ahuja H.L. (2008), Macroeconomics Theory & Policy, S. Chand & Company Ltd., Ram Nagar, New Delhi. 11. Bhole L.M. (1999), Financial Institutions & Markets, Tata McGraw-Hill Publication Company Ltd., Delhi. 12. Dwivedi D.N. (2007), Macroeconomics Theory & Policy, Tata McGraw-Hill Publication Company Ltd., Delhi. 13. DattR.&K.P.M.Sundaram(2010),IndianEconomy,S. Chand & Company Ltd., New Delhi. 14. Ghosh B. N (2011 :)Managerial Economics and Business Decision , Ane Books Pvt Ltd Mumbai. 15. Gupta S.B. (1994), Monetary Economics, S. Chand & Company, Delhi. 16. Gupta S.G. (2001), Macroeconomics Theory & Applications, Tata McGraw-Hill Publication Company Ltd., Delhi. III 17. N. Gregory Mankiw (2005), Macroeconomics, Worth Publisher, 41, Madison Avenue, New York. 18. McConnel, C. R. & H. C. Gupta (1984), Introduction to Macro Economics, Tata McGra-Hill Publishing company Ltd., New Delhi. 19. Misra, S. K. & V. K. Puri (2010), Indian Economy: Its Development Experience, Himalaya Publishing House, Mumbai. 20. Musgrave R. & P. Musgrave (1983), Public Finance Theory & Practices, Singapore. 21. Pathak B.V. (2005), Indian Financial System, Pearson Education, Delhi. 22. Stonier A.W. & D.C. Hague (2004), Textbook of Economic Theory, Pearson Education, Delhi. 13. www.rbi.org . 1 1 Module 1 INTRODUCTION MEANING AND SCOPE OF MACRO ECONOMICS Unit Structure 1.0 Objectives 1.1 Introduction 1.2 Nature of Macro Economics 1.3 Scope and Importance of Macro Economics 1.4 Limitations of Macro Economics 1.5 Difference between micro economics and macro-economics. 1.6 Summary 1.7 Questions 1.0 OBJECTIVES x To understand the nature of general economics. x To understand the meaning and nature of Macro economics x To acquaint with the Nature of Macro economics x To familiar with Scope and Importance of Macro Economics x To know the Limitations of Macro Economics x To understand the Difference between micro economics and macro-economics 1.1 INTRODUCTION Economics is the social science that studies the production, distribution, and consumption of goods and services. A definition of modern economics is that of Lionel Robbins in a 1932 essay: "the . 2 science which studies human behaviour as a relationship between ends and scarce means which have alternative uses." Scarcity means that available resources are insufficient to satisfy all wants and needs. Common problems among different types of economic systems include: * what goods to produce and in what quantities (consumption or investment, private goods or public goods, etc.) * how to produce them (coal or nuclear power, how much and what kind of machinery, who farms or teaches, etc.) * for whom to produce them, reflecting the distribution of income from output. The subject thus defined involves the study of choices as they are affected by incentives and resources. Areas of economics may be divided or classified into various types, including: * microeconomics and macroeconomics. * positive economics ("what is") and normative economics ("what ought to be") * mainstream economics and heterodox economics * fields and broader categories within economics. One of the uses of economics is to explain how economies, as economic systems, work and what the relations are between economic players (agents) in the larger society. 3 1.2 NATURE OF MACRO ECONOMICS Macro Economics is the study of aggregates or averages covering the entire economy, such as total employment, national income, national output, total investment, total consumption, total savings, aggregate supply, aggregate demand and general price level, wage level and cost structure. Otherwise, it is aggregative economics which examines the interrelations among the various aggregates, their determination and causes of fluctuations in them. Prof. Ackley defines Macro Economics as “Macro Economics deals with economic affairs ‘in the large, it concerns the overall dimensions of economic life. It looks at the total size and shape and functioning of the elephant of economic experience, rather than working of articulation or dimensions of the individual parts. It studies the character of the forest, independently of the tress which compose it.” 1.3 SCOPE AND IMPORTANCE OF MACRO ECONOMICS Macro Economics is of much theoretical and practical importance. Let us see what are the importance and the scope where macro economics are being used. 1. To Understand the working of the Economy The study of macro economics variables is requisite for considerate the operation of the financial system. Our main economic complexities are associated with the performance of total income, irredundant and the normal price scale in the fiscal. These variables are geometrically measurable in this manner facilitating the probabilities of analysing the effects on the functioning of the economy. 2. In Economic Policies Macro Economics is extremely useful from the view point of the fiscal policy. Modern Governments, particularly,