Local hi friends chatsg

The Income Theory of Morey li,y ■expenditure generates income and income generates further expenditure Thus income theorists believed that the level of income depends upon the behaviour of the circular How of expenditure or spending (consumers* and investors’ spending, for new consumption and investment, and the enterpriser t spending on the factors of production) An expansion of this circular Sow of spending means an expansion of money income and a contraction of these spendings mean; a contraction of money income Obviously a constant flow or expenditure will generate a constant flow nf money income m the community Money income determines the .pending capacity of the com mumty and the aggregate expenditure of the community cornu- tutwg effective demand, in turn, determines the real income, or the S^i^SESES SJSj K" undent £ «h -g-' d V.’e S. Mechanism of International Payments (Foreign Exchange) ... In another way it may also be conceived that, investment function remaining the same, if saving function is shifted upward, saving will exceed investment, as expressed in Fig 2(B) Then also. of a Trade Cycle (») Reflation It is a situation of ruing pnees, deliberately undertaken to relieve depression With rising prices, employment, output and incom“ abo increase till the economy reaches the Full employment ceiling In the above diagram, FF line represents the full employment ceiling and represents the normal path In the beginning when the economy is at a point of below full employment equilibrium, an in- crease m money supply leads the economy to move on the path o AB However, till the economy reaches the point B, price rise is accompanied by the expansion of employment ana output^ i n situation is, thus, described as “semi inflation*’ or Reflation . This obviously means that disguised unemployment is not responsive to effective demand as underemployment is To that extent, supply would not increase and increased aggregate demand, due to monetary expansion, will exhibit itself in the form of higher prices (m) A high marginal propensity to consume in an underdeve- loped country is also regarded as an inhibitory factor to the increase in supply Dr V K R V Rao points out that if the propensity to consume is high, it only means that a large volume of production (particularly agricul tural) will be consumed (by the farmers), without it com- ing into the market at all, and supply m the market being less, the price rise will be obvious 11 Another important factor contributing to inflation in under-* developed countries is that a large volume of primary production of these countries is exported This obviously means a cut in the supply available for home consumption This may lead to a rise m prices, and the problem is aggravated further when the export earned incom" is spent for domestic goods and not for imports Lastly, when government in an underdeveloped economy incurs huge public investment expenditure on development pro- grammes and tries to buitd social overhead capital of heavy industries projects, and neglects the expansion of consumption goods industries, then increased employment and income, resulting from mcreased public expenditure, will lead to an increase in aggregate demand for consumption goods In that case prices of commodities are bound 'o rise and an inflationary spiral will develop The situa- tion is more grave when public expenditure is financed by creation if new money or additional purchasing power In a nutshell however excess demand at both the aggregate and social levels shoul 1 be regarded as the basic cause of the infla- tionary spiral emerging in the primary producing countries and the impact of expansion of money supply on this propensity is of g r ^ at significance It has been observed that the widespread tendency for demand to exceed available supplies of goods and services is bur a reflection of the deep rooted aspiration of the backward community to achieve higher standards of living In an underdeveloped Analytic of Inflation and Deflation 193 Fj$ 7 Speed Categories of Inflation It must be rtmembered that the difference between all these four types of inflation is one of degree than of kind They are species of (h* 8 une genus (II) Excessive, Cost Deficit and Flight Inflation Discerning inflation, according to the factors which influence Tnonev supply and demand for goods and services, we have (») ex« Crime money supply inflation , (»») cost inflation , («»i) deficit mflafior and (tr) flight inflation Excess* vt money supply inflation This is classical types of inflation where there is an excess of money supply in relation to the availability of real goods an services This type of inflation is usually conceived with reference to the cyclical fluctuations in the economy, and measures of monetary controls to check infla- tionary or deflationary trends n Coal Inflation When inflation emerges on account of a rise in factor cost, it is called cost inflation It occurs when money incomes (wage ratp, particularly) expand more than real productivity Cost inflation has its course through the level of money costs of the factors of production and in particular through the level of wage rates Due to a rising cost of living index workers demand higher wages and higher wages in their turn increase the costofproduc tion, which a producer generally meets by raising prices This process of spiralling may reach higher and higher levels In this case, however, cyclical anti inflation remedies of monetary controls are not relatively effective Deficit Inflation When the government budgets contain heavy deficit financing, through creat ng new money, the purchas ing power m the community mcreafmt induced inflation During a planning era.

Local hi friends chatsg-86

V 8°“ other hand^ r g OC3 U P* leav, D 8 MV unchanged On the saving Thus the mmol*'!? ' " whe „ investmem Thus, if saving exceeds myestment ' the saving schedul decreases), saving remaining constant ^ ^ fal I and ^efore, is a stable funenon of mcome^.n^ con tinue to fal Ij** saving will al«o contract.

deficiency When the boom ends, inline declines as investment falls back and saving exceeds investment The 1TM— the laving and investment approach— also sheds tnonev which h *^ e P he n°fenon of the velocity of circulation or of Q? a “y«“‘ous factor in all the ve.sions «JTi M Th savin 8 a "d investment theory reveals that when people save money and keep cash balances, it means that they are Wealth " I,qu L d a,! 0 ve Ioc, I «b« When money supply is In the level of,^ ° f 3 d 'P r6 ” ,on - ■■ sometimes has no effect down as rapidly ,er ” mol °W' r . jl Th e ITM shows that the saving- forceful than M ^ their reactions are more causal and saving andmvatain^* income theory, the relationship between fluctuations of OTploralm'^H d ' r p ' rta "“, on I !

8 have Y=C S The Income Theory of Money kind, inadequacy of money can stop a boom In a boom period, if there is shortage of money supply or bank credit or loanable funds for investment become scarce, the rate of interest would nse people would save more, and investment would fall due to lack of lands and rising interest rates and collapse of marginal efficiency of 5B£ d « 10 demand . Jh y “ nver,1 “S their cash balances into durable goods Thus, when saving exceeds investment, people's demand for If theo Mani'r! r Cha,n react,on The change m bnnp ablftchaies^ 4 er d Lul*mh wh,ch ' “J“ ment, which in »,fm 06 re,at { on jnip between saving and invest- excess S SZ5 ? are m bnum level And if’iavinvf a' CH t Wlll , tend 10 fal1 below their equib- «° nse ab °™ their *$£££$•* investment, pnees will tend active and forceful 1 ' q '^. r of mone y) to be the only investment relationship if? The ITM shows that the **vwg : investment relatiomhm.

phys ,cal income-expenditure approach, tnu , P f ^ ]„ the case of a output as well as the ' both price level and physical contraction US ^ou.y income fall , economic output (or real income) as wen as 7 activity as a whole will contract, and versa Y , at nnstulates relate to income expenditure The above mentioned postulates rewic approach to the income theory o mone Keynes system^ r Zf -f Sr'&S theory of money also described as ,he.av,„^d,nve.^m.ppro^ TMENT ^ We may begin that total expenditure (E) det Expenditure (C) Since Total Expenditure Expenditure (I) Y=C I . of its income m two practical ways The commumty disposes 01 ^chase new consumption It uses a part, ordinarily a la 8 P ^ algebraically we may goods and the other part « » ved lim .

Fundamental Psychological Law of Consumption 82 B Consumption Function 84 C Technical Attributes of the Consumption Function 88 D Factors Affecting the Consumption Function 92 E Significance of the Concept of Consumption Function 96 F. Marginal Efficiency of Capital and Rate of Interest 107 F, MEC Schedule 109 G Investment Demand Schedule no H. The Concept of Savings 140 B Determinants of Savings 142 C Saving : A Virture or a Vice ? the0 , r y* fav '«g and point of less than full employment.

Keynes’ Criticisms against the Classtcal Theory ... Keynesian Theory of Emplojmcnf 55-81 A Introduction 55 D Pnnuplcs of Effective Demand 56 C Anal) sis of the Level ol Effective Demand 57 D How GNP is determined 70 E Pa adox of Poverty and Potential Plenty 75 F Outline ot Keynesian Theory of Employment 77 G Shortcomings of Keynesian Theory 80 23 The Consumption Function 82— 1(10 A. 101-123 A Introduction 101 0 Meaning of Investment Function 102 C Marginal Efficiency of Capital 102 D Difference between Marginal Productivity and Margin »1 Elficicncy of Capital 105 E. " which invest, differs from Tl "»’ Keynes investment can be, and norma *' .

COLLEGE, LIBRARY KOTA (Roj J Students can retain library books only for two 4 weeks at the most BORROWER'S Mo. 6 Inflation is fostered by the interaction of a multitu eo economic factors The Income Theory of Money 167 without any corresponding proport lonal cxpamion m s apply money but there cannot be a permanently higher level of pn«s without the support of permanently larger expansion in money “pply H«e co Tea the of the ago ofd quantity theory of money Thuj, the income expenditure approach date the quantity theory but tnuead uncover, the underiyinstoei that generate changes, which the equations of the QTM merely In fact, the 1TM supplements and does no. Since Janata Government failed to- arrest inflation, it could not survive for long Congress I Govern* Analytic of Inflation and Deflation 197 conditions where there is failure or crops, foodgram prices shoot up Sporadic inflation is a situation in which direct price control, if skilfully used is most Ukely to be beneficial to the community at large (V) Open and Repressed Inflation An inflation is open or repressed according to government’s reaction to the prevalence of inflationary forces in the economy Open Inflation When the government does not attempt to prevent a price rise inflation is said to be open Thus inflation is open when prices rise without any interruption In open inflation free market mechanism is permitted to fulfil its historic function of rationing the short supply of goods and distribute them according to consumei s ability to pay Therefore, the essential characteristics of an open inflation lies in the operation of the price mechanism as the sole distributing agent The post war hyper inflation during the nineteen twenties in Germany is a living example of open inflation Repressed Inflation When the government interrupts a price me there is repres ed or suppressed inflation Thus suppres* sed inflation refers to those conditions in which price increases are prevented at the present time through adoption of certain measures like price controls and rationing by the government but they rise in future on the removal of such controls and rationing The essential characteristic of repressed inflation in contrast to open inflation is that it seeks to prevent distribution through price nse under free market mechanism and substitutes instead a distribu- tion system bascfhm controls Thus, the administration of controls is an important feature of suppressed inflation However, many economists like Milton Friedman and G N Halm opine that if there has tp be any inflation it is better open than suppressed Suppressed inflation is condemned as it breeds a number of evils like the phenomenon of black market hierarchy of price controllers and rationing officers, and uneconomic diver- sion of productive resources from the essential industries to the non essential or less essential goods industries ) The wage unit tends to rue before the full employment has been readied , and (v) The remunerations of the factors entering into marginal cost will not at all change in the same proportion This shows that, as aggregate monetary demand increases with the increase in money supply, supply of goods does not increase in like proportion due to its imperfect elasticity These are the very ‘'bottle- necks” inhibiting the increase in supply even though resources are available, and all of which tend to push up the marginal cost On account of such bottlenecks, at various levels in the structure of the economy, it is prices, rather than output, or employment and income, that tend to increase with monetary expansion and increase in demand Apart from the general bottlenecks described above in an underdeveloped economy, there are various other forms of botlle- aeckr thsc caon* refotme rigidity ar the /apply o!

DUE DTATE SIGNATURE a*pfr m i MONEY, BANKING, INTERNATIONAL TRADE AND PUBLIC FINANCE Money Is a means and not an end of man's life International Trade and Public Finance D. MJTHANI Professor and Head, Department of Economics Maharashtra College of Arts, Science and Commerce University of Bombay Fourth Revised Edition m Himalaya G Publishing c House BOMBAY © NAGPUR © DELHI Ft ohthed by Mrs Meena Fandey for HIMALAYA PUBLISHING HOUSE head O ce "Ra*i do*, t Dr Bhalerao Mar 9 Girgaon (Ke Jcu/adi) Bombay-400 004 / Phones. ™P p, ’ M *5' Si To quote Crowther, thus The Q,uantuy Theory of Monej expiuns as it were, the average level of the sea th g investment theory explains the violence of the tides In One, It may be satd that both these *’ b T t n as ITM— must be put in a set m order to understand th P of value of money and level in the short. and design a suitable monetary policy, from time to .REFERENCES 1 Dillard. O An Outline of Money p 143 3 Ibid, p 149 4 Ibid , p 147 1 QUESTIONS FOR DISCUSSION 1 "The value or money In fact, b a ^nsequence of the lota n than or the quantity or money Discuss (Bombay. goods These are * (0 Market imperfections prevent an optimum allocation of resources, thereby preventing the extension of the actual production frontier The most frequently cited are im- perfect knowledge imperfect mobility, specificity of factors and imperfect divisibility of factors Such market imperfections as factor immobility, ignorance of market 206 Analytic oj Inflation and Deflation be profitably invested by the entrepreneurial class in productive channels, thereby raising the le\el of employment, output and income Thus, the rationale of a policy of development through inflation” is that inflation raises the ratio of profits to aggregate community income (or national income) and the process continues till profits increase to the extent that entrepreneurs- can finance the higher rate of investment from the saving out of their profits with- out any further recourse to credit, t e„ monetary expansion.

ineffective in In a depressionary permd lupply Ou the other blow, a mere ’ an d recovery W. Export Boom Inflation When a country having a sizable- export component in its foreign trade experiences a sudden nse in the demand for its exportables against tl e inelastic supply of exportables in the domestic market, it obviously implies an excessive pressure of demand which is revealed in terms of persistent inflation at home Again, trade gams and sudden influx of exchange remittances may lead to an increase in monetary liabilities which is further reflected m the rising pressure of demand for domestic output causing an inflationary spnral to get further monentum.

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