Of permanent value pdf free download

I am thankful to many of my friends and colleagues. Without their help, this work would not have seen the light of day. Last but not the least; I would like to thank my postgraduate and undergraduate students. Sanjay Jayawant Rode 11 Download free eBooks at bookboon. Apply by World class www. Modern economies are much more diversified in terms of production. Now, skilled labor and advanced computerized machineries are used in the production process.

The production system, in the first instance, satisfies the need of people for consumable goods and services. It follows therefore, that in a closed economy, without a government sector or interference, all products generated from all natural resources are consumed by people. If we assume that no external sector exists, then exports and imports are not possible.

In case of lower consumption and more income, some income can be saved. This is because savings become investments in the long run. We live in a democracy and the government forms an important part of the economy. We could add the government to the above equation, as the government makes expenditures on various infrastructure projects and welfare schemes.

Hence, the total disposable income is affected by government expenditures. These activities require additional expenditures. The aim is to increase the foreign capital flow and reserves. Including net exports is not enough for equilibrium in the balance of payments.

Capital flow is also taken into consideration. Similarly, total payments comprise the capital outflow and payment for imports. Output is measured in terms of money; it is the national income of the country. The right hand side of the equation shows the disposable income which is equivalent to the Gross Domestic Product GDP plus transfer payments and taxes.

Point E shows that income is equal to the aggregate demand. If output is more than income then firms reduce production. In the long run, there is less production. The output remains in equilibrium. Thus, the output and equilibrium income are achieved. Goods are produced up to the point where they are adjusted to aggregate demand. In this case, the presence of unplanned inventories causes the firms to work to control supply.

Forecasting aggregate demand is something a producer would do on a regular basis. Hence, they invest more economic resources in their firm and find a market for their products in the long term.

In such a case, planned spending is equal to planned output in an economy. Therefore, the planned spending is also equal to the planned income.

This shows a direct relationship between income and spending in an economy. But an opposite situation, commonly known as a recession, is also possible. We will discuss this issue in detail in the next section. In general, the higher the disposable income, the higher the consumption. We must understand that consumption of an individual cannot be zero.

It always increases with an increase in income. Their income is equal to their consumption. When the household income increases but consumption remains constant saving can occur. But it is usual that as income rises, consumption also rises.

If we substitute equation 1. Aggregate demand AD depends on the consumption and planned average investment. We assume that the autonomous investment in the economy will be equivalent to the average consumption. Therefore, investment will take care of the aggregate consumption in the economy. If the income level rises, then the propensity to consume will also rise. But in a welfare state, the government regularly invests in the economy.

If commodities are in short supply then the government takes the initiative to supply them. If overall production is not sufficient, then the government imports commodities from various countries. Therefore, the government and the external sector cannot be ignored.

Figure 1. Therefore, the aggregate investment increases to A , where demand increases and the equilibrium aggregate will be achieved at E. When there is an investment in inventory, output increases to Y. If more output is produced then income declines. Therefore, final output is achieved at Y and equilibrium at E.

An increase in the autonomous investment leads to an increase in income. When income increases expenditures also increase.

As expenditures continue to increase, at first, output starts to increase and then income. This can be explained by the following equation: 26 Download free eBooks at bookboon. The multiplier is defined as the amount at which equilibrium output changes when autonomous demand increases by one unit. If the output change is more, then autonomous investment is also more.

The change in the aggregate demand is explained as follows: 27 Download free eBooks at bookboon. Therefore, firms will respond to the change and increase production. This will lead to an increase in induced expenditures. Such expansion in production increases the induced expenditures; hence, the outcome is an increase in aggregate demand to AG.

The expansion reduces the gap between aggregate demand and output to the vertical distance FG. The change in income is defined as Y2. It exceeds the increase in autonomous demand EQ. In the diagram, the multiplier exceeds 1 because consumption demand increases with the change in output, finally leading to a change in demand. Government decisions directly affect the disposable income of people.

The change in income occurs in two ways. Firstly, the government produces or purchases goods and services from the market. It provides these goods to the people at low prices. This is done through the public distribution system. The disposable income of people increases as a result. Secondly, the government reduces taxes and this leads to an increase in the disposable income of the people. Similarly, the government spends on defense, infrastructure facilities, and law and order.

The expenditures in all welfare schemes are always higher. Therefore, C can be replaced with YD. Similarly net income to households is the transfer payment of taxes. Net transfers also affect consumption. The higher the net transfers from the government, the higher the consumption expenditures of the people.

The marginal propensity to consume MPC is related to C 1-t. The new aggregate demand curve AD is denoted as a flat slope. The slope is flat because the government levies taxes on income and whatever income is left disposable income is used for consumption. Therefore, the propensity to consume out of income is now c 1-t instead of c.

Taxes are assumed to be constant. In this case, the government expenditures shift the intercept of the aggregate demand curve up and the curve becomes flatter. Government expenditures, purchases and net transfers affect the income of people, and will be explained in detail in the next part. A balanced budget helps manage government expenditures and increases income.

A budget surplus consists of more revenues and lower expenditures. Alternatively, if the expenditures exceed the total taxes collected, the budget is in deficit. The tax rate is not given much importance; but is dependent on the tax collection efforts of each government. Each government has a different capacity for tax collection but each government tries to minimize its expenditures. The increase in income is in the form of taxes. This is further explained in the Table 1.

But the average supply of goods in the economy is considered as the aggregate supply. Such an average supply keeps prices at a constant level. The aggregate supply of goods determines the equilibrium price.

The average price level decides the aggregate demand. If prices change then the aggregate demand is affected. The aggregate demand is related to the average price and supply. If the aggregate demand rises, it reflects on the aggregate supply. The money and goods market have different equilibriums. More info here. The price level remains in equilibrium. The prices of commodities can change if the demand for goods rises faster while the supply remains constant.

This could result in a rise in the price of the commodities. The rise in price, in turn, will have an effect on the demand for the commodity. There is an inverse relationship. When the supply of a certain good rises while demand remains constant, the price of this good declines or falls.

If we consider money market equilibrium then the demand for money is equal to the supply of money. The interest rate remains constant in the long run.

If the demand for money increases fast due to a number of reasons while the supply remains constant, then the interest rate will start rising. When the supply of money rises while demand for money declines, the interest rate declines but this is a short term adjustment. At the same time, the demand for goods is also equal to the supply of goods. Prices remain constant and the goods and money markets remain in equilibrium with stable prices and stagnant interest rates. Such equilibrium in the goods and money markets may change after an economic expansion or contraction due to monetary and fiscal policies in the short run.

In the long run, both markets remain in equilibrium. Alternatively, in the goods market, the demand for goods and supply of goods remain in equilibrium. The prices of goods remain in equilibrium. In other words, the prices of goods remain constant.

The aggregate demand curve ADC is related to the interest rate and to the income level. As the aggregate demand curve shifts upward, the interest rate falls and the aggregate income increases. The planned investments in the economy increase with an increase in output and income. In a closed economy, output is equal to expenditures. As the level of income rises, the consumption expenditures increase. There is a positive relationship between consumption and income. Income is inversely related to the interest rate.

As the interest rate starts rising, the consumption expenditures start declining. The interest rate is constant. The interest rate is related to the aggregate demand. At point E, the aggregate demand curve shows the interest rate and income. The aggregate demand curve remains in equilibrium with income and the interest rate. In the long run, consumption expenditures increase due to the increase in disposable income. A fall in the interest rate leads to an increase in investments and also leads to a rise in incomes and investments by the government and the private sector.

The government expenditures infrastructure projects, defense, law and order increase every year due to the welfare state.

Such developmental and social welfare expenditures raise the aggregate demand in the economy. In figure 1. The decrease in the interest rate leads to a rise in income. If we join points a and b, the result is a downward sloping IS curve. Properties and shift of the IS curve 1. The IS curve is downward sloping from left to right. A change in the aggregate demand curve leads to a shift of the IS curve from left to right.

The IS curve is steep when there is a small change in the interest rate and a large change in income. This leads to an increase in the aggregate demand which is observed at point E. But a rise in the aggregate demand shifts the AD curve to AD1. The new equilibrium is achieved at E1. At this new equilibrium point, income rises from Y to Y1. If we derive points a and b, then a shift occurs from IS to IS1. The new IS1 curve does not get affected by the interest rate.

There is no change in the interest rate but income changes. The slope of the IS curve remains the same. The interest rate remains constant when there is no change in the demand for and the supply of money.

Therefore, when the demand for money rises, the interest rate rises, too. It is also possible that the demand does not rise but the supply remains high. In this case, the interest rates decline.

The demand for real balances increases with the level of real income and decreases with the interest rate. For money market equilibrium, the demand for money should equal the supply of money.

In the following figure, figure 1. The interest rate is constant at income level Y. As the demand for money shifts from Md to Md1, the interest rate also rises from I to I1. At the same time, income rises from Y to Y1. When there is more and more demand for money, income further increases. But at the same time, the interest rate also rises. This means that the LM curve shows the link between the interest rate and income.

There is a positive relationship between the two variables. The supply of money also shifts from MS to MS1. The new demand and supply of money point E1 shows an increase in the income, as shown at Y to Y1.

At point A and at point B, two separate LM curves are drawn. An expansionary monetary policy leads to an increase in the income. The interest rate remains constant at I.

The LM curve shifts to LM1. Properties of the LM curve: 1. The LM curve is upward sloping. The LM curve shows the relationship between income and the interest rate. At the same level of the interest rate, the demand for money shifts the IS curve to the right. The downward sloping IS curve and upward sloping LM curve always intersect with each other at different possibilities of equilibrium.

This means that the interest rate and income remain constant. It is possible that in the short run, due to expansionary and contractionary fiscal and monetary policies, the shift can either be backward or forward. The interest rate and income can either decrease or increase.

The arrows in the diagram show the movements of the original equilibrium point. The following adjustments are shown in the table 1. This is because following one policy may have an effect on the income and on the interest rate.

In the long run, either policy is ineffective. Lower taxes to pay means people have more disposable income. Lower taxes on various commodities means that there is an increase in the disposable incomes of people. But an increase in disposable incomes could also lead to people saving and keeping their money in banks to take advantage of the rise in the interest rates. In the figure, the interest rate increases from I to I1. The increase in incomes was expected at Y1 but they increase further to Y2.

The crowding out occurs in the expansionary fiscal policy. It is shown at Y1 to Y2. The increase in the interest rate wipes out the increase in the total income. Therefore, at a higher level of income and higher interest rates, industrialists do not find it easy to invest money and their investments in firms start declining. As investments decline, the generation of employment also starts declining.

Workers will not be able to find jobs and their incomes will also decline. The figure shows that an increase in the interest rate reduces investments made by industrialists leading to changes in the level of employment and income in the economy. In the long run, the economy is in equilibrium at point E.

Short-term expansionary fiscal policies have no effect on incomes and the interest rate. The monetary authority therefore, always tries to increase the money supply and reduce the interest rate.

At lower interest rates, increased investments are possible. The reduction in the interest rate helps increase investments in the economy. The level of income increases from Y to Y1. But in the long run, the reduction in the interest rate and the increase in incomes lead to more investments. Production increases due to higher capital investments. But higher production could also lead to lower demand, and to prices declining.

This is because every firm tries to sell their products in the national and international markets. They may sell at lower prices just to cover the fixed costs of production. The decline in prices due to competition reduces the profit margin. The investments made and profits gained do not match. Future investments are affected. A recession occurs. A decline in investments reduces the employment opportunities, which reduces the income levels. Incomes decline further and go back to the original level.

In the long run, an expansionary monetary policy is ineffective. The interest rate I and incomes Y remain unaffected in the long run. Prices are constant. The money market is in equilibrium when the demand for money equals the supply of money. Both the goods and money markets are in equilibrium with the interest rate and income.

Expansionary fiscal and monetary policies lead to increases and decreases in the interest rate and incomes, but only in the short term. In the long term, both monetary and fiscal policies are ineffective. The goods market shows the equilibrium of income and price level.

The money market equilibrium shows the relationship between the interest rate and income. If both markets are in equilibrium with the interest rate and income, then the aggregate demand is also in equilibrium. When the IS curve shifts to IS1, perhaps because of an expansionary fiscal policy, the new equilibrium point is observed at E1.

In the second diagram, if points a and b are joined, the aggregate demand curve can be derived. The The rise in rise in the money the money supply supply and and decline decline in interest in interest ratesrates affect affect income and income and output, output,increasing them.

The interest rate will fall from i to i1. An expansionary monetary policy will have no effect on the price level. Prices will remain at equilibrium at P. If we join the two points a and b, the AD curve can be derived.

The downward sloping supply curve is the aggregate demand curve. The classical supply curve assumes that the supply of the factor of production is fixed in the classical way. The supply of land, labor, and capital is fixed in an economy and does not change. In a, the aggregate supply AS curve is a vertical straight line but in b, it is a horizontal line.

In the Classical case, all the factors of production in the economy are fully employed. Therefore, there is no scope to increase the factors of production.

The supply remains fixed for the long period. Fiscal policy and the aggregate supply curve An expansionary fiscal policy will shift the IS curve upwards without changing output. It shifts upwards, leading to an increase in the interest rate, I to I1. Income remains the same in the long run. In the long run, the effect on income is not positive. Monetary policy and the classical aggregate supply curve Fiscal policies are ineffective on the classical aggregate supply curve in the long run.

An expansionary monetary policy has also no positive effect on output in the classical aggregate supply curve. An expansionary monetary policy causes the LM curve to shift upward. The increase in the money supply has a positive effect on the interest rate. The income remains unchanged or the same in the long run.

We can conclude therefore that an expansionary monetary policy is ineffective on the classical aggregate supply curve. A rise in prices cannot decrease the real wage rate but a fall in prices can increase it. This means it can be viewed across multiple devices, regardless of the underlying operating system. Not only do we have a killer, free iMore for iPhone app that you should download right now, but an amazing, and equally.

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