Untitled Quiz

Introduction

• Macroeconomics is a study of the whole economy, examining its overall health
• It differs from microeconomics, which focuses on individual markets
• Macroeconomics considers factors like prices, employment, and economic growth across the whole economy

National Income Accounting

• Basic Concepts: Economics deals with factors like natural resources, labor, and capital to generate economic wealth

• Flow of Production: Goods and services are produced and transformed through productive processes

• Final Goods: Goods not used as inputs in further production

• Capital Goods: Durable goods used in future production

• Intermediate Goods: Goods used as inputs in another production process

• Consumption Goods: Goods purchased for direct consumption.

• Capital Goods: Goods used in a production process.

• Methods:

  • Product Method: Calculates the total value of all final goods and services produced in an economy
  • Expenditure Method: Calculates aggregate expenditure on final goods and services
  • Income Method: Calculates the income received by all factors of production

Money and Banking

• Functions of Money:

  • Medium of Exchange: Facilitates the exchange of goods and services
  • Unit of Account: Provides a common way to measure and compare different goods and services (in monetary values)
  • Store of Value: Holds purchasing power over time.

• Demand for Money:

  • Transaction Motive: Holds money for everyday transactions
  • Speculative Motive: Holds money in anticipation of future opportunities (e.g., buying assets when interest rates are low)

• Supply of Money:

  • Currency: Notes and coins issued by the central bank (e.g., RBI in India)
  • Deposits: Balances in checking/savings accounts held at banks
  • High-Powered Money (also called Monetary Base): Currency in circulation + reserves held by commercial banks
  • Instruments of Monetary Policy: Tools used by central banks (e.g., RBI in India) to manage the money supply

Income Determination

• Ex Ante and Ex Post:

  • Ex ante: Planned or expected values of variables (e.g., consumption or investment) in a given period.
  • Ex post: Actual values of variables in a given period

• Autonomous Expenditure and the Multiplier:

  • Autonomous Expenditure: Expenditures that are independent of the level of income
  • Multiplier: The magnified effect of an autonomous expenditure change on the equilibrium level of income.

The Government: Functions and Scope

• Functions of Government:

  • Allocation: Providing public goods (e.g., national defense) as they are not provided efficiently by the private sector, due to free-rider problem
  • Distribution: Ensuring distributive justice in the economy, through taxation, spending and transfers to households
  • Stabilization: Regulating the economy through fiscal policy to manage fluctuations like unemployment and inflation

• Components of Government Budget:

  • Revenue Account: Current government income and expenditure
  • Capital Account: Government capital income and expenditure

Open Economy Macroeconomics

• Open vs. Closed Economy: In an open economy, there are transactions with other countries (imports and exports)
• Balance of Payments: Records transactions between a country and rest of the world
• Exchange Rates: The price of one currency in terms of another
  • Flexible Exchange Rates: Determined by supply and demand within the foreign exchange market
  • Fixed Exchange Rates: Governed by monetary authorities, a country pegs a currency to another stable currency or a commodity, like gold.
• Trade Deficits and Surpluses: Trade deficit (imports > exports) and Trade surplus (exports > imports)
• Saving-Investment Identity: Saving= Investment + Net Exports in an open economy