Name basit wahla
Subject macro economic
Q NO.1 DESCRIBE THE CAUSES, CONSEQUENCES AND TYPES OF INFLTION AND MEASURE TO ELIMINATE INFLATION.
INTRODUCTION:Inflation means sharp upward movement in the price level. According to Coulbourne, inflation means; “Too much money chasing too few goods”. When output is unresponsive to change in money supply. Inflation is generally associated with the abnormal increase in the quantity of money resulting in the abnormal rise in the price.TYPES OF INFLATION:DEFLATION: It is just opposite to inflation. Deflation is said to exist when there is persistent downward movement in the price level. In other words deflation can be called falling price and not low prices. Deflation is opposite of the inflation.REFLATION: Reflation is a moderate degree of controlled inflation. Cole has defined it as inflation deliberately undertaken to relieve a depression. When price has come down abnormally so low that govt, a activity ceases to be profitable. The currency authority may adopt measures to put more money into circulation with a view to raising prices. This is one remedy to relieve depression. Reflation means raising the level of economic activity in a country by government action.STAGFLATION: Stagflation is derived from two words stagflation and inflation. There is an increase in price level and decrease in the output and employment. Rice in prices and stagflation inflation run side by side. Stagflation means high employment and inflation is a persistent rise in general price level. Stagflation is a situation where recession is accompanied by high and rising inflation.DISINFLATION: It refer to the situation when an attempt is made to bring down the prices moderately from high level. Various kinds of monetary and fiscal measures are adopted to bring down the prices without causing unemployment in the country. We call it disinflation
.CAUSES OF INFLATION:DEMAND PULL INFLATION:
High Monetary Expansion: The supply of money is expanding quickly every year but the supply of goods and services is not increasing according to that rates. Due to this, prices are rising.Foreign Remittances: Due to the increased remittance by the people working outside the country, purchasing power of their families increase day by day, so the demand is increased.Increase in Wages: The wages, pensions and salaries have increased the purchasing power of the people. Wages and prices chase each other.Increase in Population: The rate of population growth in Pakistan is more than 3%. Due to this, aggregate demand is increasing day by day and prices are increasing.Natural Calamities: Due to floods, excessive rains and earthquakes the level of production is decreased, increase in demand, hence the prices of goods will be increased.Wars: During war period, the supply of consumer goods falls greatly due to decrease in production which brings inflation.COST PULL INFLATION: Increase in Indirect Taxes: When the government imposes indirect taxes, it increase the cost of production which causes cost push inflation.Increase in Wages: When there is an increase in wages level, the cost automatically increases. The factory owner will increase prices of commodities because cost of production has increased with the increase in wages.Increase in Profit: If the producer are enjoying monopoly or near monopoly power, they raise their profit on goods produced. The higher profit margin increases cost of production and hence raise the general price level.Devaluation: Devaluation brings inflation due to rise in the prices of imports. If a country is heavily depending on imported raw material, devaluation creates cost push inflation.Increase in Prices of Raw Material: When there is an increase in the price of imported raw material (say oil) there will be an increase in cost of production of the related industry and when the cost increase, the prices of commodities will automatically be increased.
WHAT IS FISCAL POLICY AND STATE ITS OBJECTIVES, DEFINITION:
Fiscal policy is government spending and taxation that influences the economy. Elected officials should coordinate with monetary policy to create healthy economic growth.Explanation:TOP 8 OBJECTIVES OF FISCAL POLICY:Fiscal policy must be designed to be performed in two ways-by expanding investment in public and private enterprises and by diverting resources from socially less desirable to more desirable investment channels.The objective of fiscal policy is to maintain the condition of full employment, economic stability and to stabilize the rate of growth.For an under-developed economy, the main purpose of fiscal policy is to accelerate the rate of capital formation and investment.“Arthur Smithies, fiscal policy aims primarily at controlling aggregate demand and leaves private enterprise its traditional field- the allocation of resources among alternative uses.”Therefore, fiscal policy in under-developed countries has a different objective to that of advanced countries.GENERALLY FOLLOWING ARE THE OBJECTIVES OF A FISCAL POLICY IN A DEVELOPING ECONOMY:
Full employmentPrice stabilityAccelerating the rate of economic developmentOptimum allocation of resourcesEquitable distribution of income and wealthEconomic stabilityCapital formation and growthEncouraging investmentFULL EMPLOYMENT:The first and foremost objective of fiscal policy in a developing economy is to achieve and maintain full employment in an economy. In such countries, even if full employment is not achieved, the main motto is to avoid unemployment and to achieve a state of near full employment. Therefore, to reduce unemployment and under-employment, the state should spend sufficiently on social and economic overheads. (a) To capture the excessive purchasing power and to curb private spending:(b) Compensate the deficiency in private investment through public investment;(c) Cheap money policy or lower interest rates to attract more and more private entrepreneurs.PRICE STABILITY:There is a general agreement that economic growth and stability are joint objectives for underdeveloped countries. In a developing country, economic instability is manifested in the form of inflation. Prof. Nukes believed that “inflationary pressures are inherent in the process of investment but the way to stop them is not to stop investment. They can be controlled by various other ways of which the chief is the powerful method of fiscal policy.”TO ACCELERATE THE RATE OF ECONOMIC GROWTH:Primarily, fiscal policy in a developing economy, should aim at achieving an accelerated rate of economic growth. But a high rate of economic growth cannot be achieved and maintained without stability in the economy. Therefore, fiscal measures such as taxation, public borrowing and deficit financing etc. should be used properly so that production, consumption and distribution may not adversely affect. OPTIMUM ALLOCATION OF RESOURCES:Fiscal measures like taxation and public expenditure programmes, can greatly affect the allocation of resources in various occupations and sectors. As it is true, the national income and per capita income of underdeveloped countries is very low. In order to gear the economy, the government can push the growth of social infrastructure through fiscal measures. Public expenditure, subsidies and incentives can favorably influence the allocation of resources in the desired channels.EQUITABLE DISTRIBUTION OF INCOME AND WEALTH:It is needless to emphasize the significance of equitable distribution of income and wealth in a growing economy. Generally, inequality in wealth persists in such countries as in the early stages of growth, it concentrates in few hands. It is also because private ownership dominates the entire structure of the economy. Besides, extreme inequalities create political and social discontentment which further generate economic instability.
Fiscal measures, to a larger extent, promote economic stability in the face of short-run international cyclical fluctuations. So, for the purpose of bringing economic stability, fiscal methods should incorporate built-in-flexibility in the budgetary system so that income and expenditure of the government may automatically provide compensatory effect on the rise or fall of the nation’s income.
CAPITAL FORMATION AND GROWTH:
Capital assumes a central place in any development activity in a country and fiscal policy can be adopted as a crucial tool for the promotion of the highest possible rate of capital formation. A newly developing economy is encompassed by a ‘vicious circle of poverty’. Therefore, a balanced growth is needed to breakdown the vicious circle which is only feasible with higher rate of capital formation. Once a country comes out of the clutches of backwardness, it stimulates investment and encourage capital formation.Prof. Raja J. Challah recommends that fiscal policy must aim at the following for attaining rapid economic growth:(i) Raising the ratio of saving (s) to Income (y) by controlling consumption (c);(ii) Raising the rate of investment:(iii) Encouraging the flow of spending into productive way;(iv) Reducing glaring inequalities of income and wealth.TO ENCOURAGE INVESTMENT:Fiscal policy aims at the acceleration of the rate of investment in the public as well as in private sectors of the economy. Fiscal policy, in the first instance, should encourage investment in public sector which in turn effect to increase the volume of investment in private sector. In other words, fiscal policy should aim at rapid economic development and must encourage investment in those channels which are considered most desirable from the point of view of society.
EXPLAIN THE INSTUMENTS OF FISCAL POLICY AND DISCUSS ITS RULE IN THE NATIONAL INCOME DETERMINATION.DEFINITION:
Fiscal policy is government spending and taxation that influences the economy. Elected officials should coordinate with monetary policy to create healthy economic growth.INSTRUMENTS:Some of the major limitations of fiscal policy are as follows:Although fiscal policy gained prominence during world depression of 1930’s, yet its practical application has a number of problems or limitations.In view of such a situation, let us understand fully problems and limitations which are associated with a fiscal policy.POLICY LAGS:During the recent times, there is not much argument about the desirability or otherwise of a discretionary fiscal policy. The burning question in this context is related with the timing of the fiscal measures. Unless the variations in taxes and public expenditure are neatly timed, the desired counter-cyclical effects cannot be realized. (а) Recognition Lag:This is the interval between the time when action is needed and when it is recognized that action is needed. This lag may exist when a change in the economy and a report concerning the change do not coincide. Such a lag has a duration of 3 months. (b) Administrative Lag:This is the interval between the time when need of an action is recognized and the time when the action is actually taken. (c) Operational Lag:The time interval between when action is taken and when it has its impact on income and employment is known as the operational or the outside lag. Albert Ando and E.C. Brown have pointed out that the change in personal income taxes produce significant changes in disposable money income and consumption within a month or two; changes in the corporate tax structure produce changes in corporate spending in about 3 or 4 months.
FORECASTING:Another most serious limitation of fiscal policy is the practical difficulty of observing the coming events of economic instability. Unless they are correctly observed the amount of revenue to be raised, the amount of expenditure to be incurred or the nature and extent of budget balance to be framed cannot be suitably planned. CORRECT SIZE AND NATURE OF FISCAL POLICY:The most important necessity on which the success of fiscal policy will depend is the ability of public authority to frame the correct size and nature of fiscal policy on the one hand and to foresee the correct timing of its application on the other. FISCAL SELECTIVITY:When monetary policy is general in nature and impersonal in impact, the fiscal policy, in contrast, is selective. The former permits the market mechanism to operate smoothly. The latter, on the contrary, encroaches directly upon the market mechanism and gives rise to an allocation of resources which may be construed as good or bad depending upon one’s value judgements.INADEQUACY OF FISCAL MEASURES:In anti-depression fiscal policy, the expansion of public spending and reduction on taxes are always important elements. The question arises naturally, whether a specific variation in public spending or taxes will bear the desired results or not. In case the injections or withdrawals from the circular flow are more or less than what are required, the system will fail to move in the desired direction.ADVERSE EFFECT ON REDISTRIBUTION OF INCOME:
It is felt that fiscal policy measures redistribute income, the actual effect will be uncertain. If income is redistributed in favor of the low-income classes whose marginal propensity to consume is high, the effect will be increase in total demand. But the fiscal action will be contractionary if larger part of the additional income goes to people having higher marginal propensity to save.SELF-OFFSETTING EFFECT:The compensatory fiscal policies of the government may discourage private investment, since the private entrepreneurs have to face a competition from public enterprises in securing labor, raw materials and finances. Moreover, increased involvement of the government in economic activity at the onset of recession strengthens the pessimistic expectations of the private entrepreneurs. Reduction in National Income:Balanced budget multiplier as a fiscal weapon can be gainfully applied during depression is conditioned by the fact of marginal propensity to spend of the recipients of public expenditure being larger than or, at least, equal to that of the taxpayers. In case it becomes smaller than the taxpayers, the fiscal programmes under balanced budget will bring about reduction in the national income.
National income is an uncertain term which is used interchangeably with national dividend, national output and national expenditure. On this basis, national income has been defined in a number of ways. In common parlance, national income means the total value of goods and services produced annually in a country.In other words, the total amount of income accruing to a country from economic activities in a year’s time is known as national income. It includes payments made to all resources in the form of wages, interest, rent and profits.
DEFLATION: It is just opposite to inflation. Deflation is said to exist when there is persistent downward movement in the price level. In other words deflation can be called falling price and not low prices. Deflation is opposite of the inflation.INFLATION:Inflation means sharp upward movement in the price level. According to Coulbourne, inflation means; “Too much money chasing too few goods”. When output is unresponsive to change in money supply. Inflation is generally associated with the abnormal increase in the quantity of money resulting in the abnormal rise in the price.
DEFINE MONETARY POLICY AND STATE ITS OBJECTIVE]S.MEANING OF MONETARY POLICY:–
Monetary policy refers to the measures which the central bank of the country takes in controlling the money and credit supply in the country with a view to achieving certain specific economic objectives.
OBJECTIVES OF MONETARY POLICY:-
The objectives of monetary policy differ from country to country according to their economic conditions. In the less developing countries like India or Pakistan its objective may be the maintenance of monetary stability and help in the process of economic development. In the developed countries its objective may be to achieve full employment, without inflation. Anyhow following are the main objectives of the monetary policy.
1. CONTROL OF INFLATION AND DEFLATION
:-Inflation and deflation both are not suitable for the economy. If the price level is reasonable and there is an adjustment between the price and cost, rate of out put can increase. Monetary policy is used to coordinate the cost and price. So price stability is achieved through the monetary policy.
2. EXCHANGE STABILITY:-Monetary policy second objective is to achieve the stable foreign exchange rate. If the rate of exchange is stable it shows that economic condition of the country is stable.
3 ECONOMIC DEVELOPMENT:-Monetary policy plays very effective role in promoting economic growth by providing adequate credit to productive sectors.
4 INCREASE IN THE RATE OF EMPLOYMENT :–
Monetary policy another objective is to achieve full employment but without inflation.
5 EQUAL DISTRIBUTION OF CREDIT :
-Monetary policy should also ensure that distribution of credit should be equitable and purposeful. The credit priority should be given to backward areas.
6. IMPROVEMENT IN STANDARD OF LIVING :-
It is also the major objective of the monetary policy that it should improve the quality of life in the country.
7 PRICE STABILITY:
The objective of price stability has been highlighted during the twenties and thirties of the present century. In fact, economists like Crustar Cassels and Keynes suggested price stabilization as a main objective of monetary policy. Price stability is considered the most genuine objective of monetary policy. Stable prices repose public confidence because cyclical fluctuations are totally eliminated.8 FULL EMPLOYMENT:During world depression, the problem of unemployment had increased rapidly. It was regarded as socially dangerous, economically wasteful and morally deplorable. Thus, full employment assumed as the main goal of monetary policy. In recent times, it is argued that the achievement of full employment automatically includes prices and exchange stability.9 ECONOMIC GROWTH:In recent years, economic growth is the basic issue to be discussed among economists and statesmen throughout the world. Prof. Meier defined “Economic growth as the process whereby the real per capita income of a country increases over a long period of time.” It implies an increase in the total physical or real output, production of goods for the satisfaction of human wants.
Q NO.5 EXPLAIN THE INSTRUMENTS OF MONETARY POLICY AND DISCUSS ITS ROLE IN THE NATIONAL INCOME DETERMINATION UNDER INGLATION AND DEFLATION.MONETARY POLICY:
-Monetary policy refers to the measures which the central bank of the country takes in controlling the money and credit supply in the country with a view to achieving certain specific economic objectives.INSTRUMENTS OF MONETARY POLICY:Fiduciary or paper money is issued by the Central Bank on the basis of computation of estimated demand for cash. Monetary policy guides the Central Bank’s supply of money in order to achieve the objectives of price stability (or low inflation rate), full employment, and growth in aggregate income. This is necessary because money is a medium of exchange and changes in its demand relative to supply, necessitate spending adjustments. To conduct monetary policy, some monetary variables which the Central Bank controls are adjusted-a monetary aggregate, an interest rate or the exchange rate-in order to affect the goals which it does not control. RESERVE REQUIREMENT: The Central Bank may require Deposit Money Banks to hold a fraction (or a combination) of their deposit liabilities (reserves) as vault cash and or deposits with it. Fractional reserve limits the amount of loans banks can make to the domestic economy and thus limit the supply of money. The assumption is that Deposit Money Banks generally maintain a stable relationship between their reserve holdings and the amount of credit they extend to the public. OPEN MARKET OPERATIONS: The Central Bank buys or sells ((on behalf of the Fiscal Authorities (the Treasury)) securities to the banking and non-banking public (that is in the open market). One such security is Treasury Bills. When the Central Bank sells securities, it reduces the supply of reserves and when it buys (back) securities-by redeeming them-it increases the supply of reserves to the Deposit Money Banks, thus affecting the supply of money.
LENDING BY THE CENTRAL BANK:
The Central Bank sometimes provide credit to Deposit Money Banks, thus affecting the level of reserves and hence the monetary base.
INTEREST RATE: The Central Bank lends to financially sound Deposit Money Banks at a most favourable rate of interest, called the minimum rediscount rate (MRR). The MRR sets the floor for the interest rate regime in the money market (the nominal anchor rate) and thereby affects the supply of credit, the supply of savings (which affects the supply of reserves and monetary aggregate) and the supply of investment (which affects full employment and GDP). DIRECT CREDIT CONTROL: The Central Bank can direct Deposit Money Banks on the maximum percentage or amount of loans (credit ceilings) to different economic sectors or activities, interest rate caps, liquid asset ratio and issue credit guarantee to preferred loans. In this way the available savings is allocated and investment directed in particular directions.MORAL SUASION
: The Central Bank issues licenses or operating permit to Deposit Money Banks and also regulates the operation of the banking system. It can, from this advantage, persuade banks to follow certain paths such as credit restraint or expansion, increased savings mobilization and promotion of exports through financial support, which otherwise they may not do, on the basis of their risk/return assessment. PRUDENTIAL GUIDELINES: The Central Bank may in writing require the Deposit Money Banks to exercise particular care in their operations in order that specified outcomes are realized. Key elements of prudential guidelines remove some discretion from bank management and replace it with rules in decision making. Exchange Rate: The balance of payments can be in deficit or in surplus and each of these affect the monetary base, and hence the money supply in one direction or the other. EXCHANGE RATE. The real exchange rate when misaligned affects the current account balance because of its impact on external competitiveness. Moral suasion and prudential guidelines are direct supervision or qualitative instruments. The others are quantitative instruments because they have numerical benchmarks.NATIONAL INCOMENational income is an uncertain term which is used interchangeably with national dividend, national output and national expenditure. On this basis, national income has been defined in a number of ways. In common parlance, national income means the total value of goods and services produced annually in a country.DEFLATION: It is just opposite to inflation. Deflation is said to exist when there is persistent downward movement in the price level. In other words deflation can be called falling price and not low prices. Deflation is opposite of the inflation