CHAPTER 1

INTRODUCTION

 Macroeconomics is a branch of economics that studies the economic variables of an

economy as a whole.
 Difference between Microeconomics and Macroeconomics
Points of Difference Microeconomics Macroeconomics
It studies about individual
It studies about an economy
1. Study matters economic units like households,
as a whole.
firms, consumers, etc.
It deals with how different
It deals with how consumers or
economic sectors such as
producers make their decisions
2. Deals with households, industries,
depending on their given budget
government and foreign
and other variables.
sector make their decisions.
It uses the method of general
It uses the method of partial
equilibrium, i.e. equilibrium
3. Method equilibrium, i.e. equilibrium in
in all markets of an economy
one market.
as a whole.
The major macroeconomic
The major microeconomic
variables are aggregate price,
variables are price, individual
4. Variables aggregate demand, aggregate
consumer’s demand, wages,
supply, inflation,
rent, profit, revenues, etc.
unemployment, etc.
 Various theories studied are: Various theories studied are:
1) Theory of Consumer’s 1) Theory of National Income
Behaviour and Demand 2) Theory of Money
2) Theory of Producer’s 3) Theory of General Price
5. Theories
Behaviour and Supply Level
3) Theory of Price 4) Theory of Employment
Determination under Different 5) Theory of International
Market Conditions Trade
6. Popularised by Alfred Marshall Keynes

 Partial equilibrium
It refers to equilibrium in one market, assuming that there is no change in other markets for
example, while analysing the equilibrium of an individual producer (optimising his/her cost
of production), we assume that there exists no change in other markets like labour and
capital markets. And consequently, wage rate and interest rate are held constant. It is the
method of study in microeconomics.
 General equilibrium
General equilibrium is the method to study equilibrium in different markets
simultaneously. It is the method of study in macroeconomics.
 Economic agents
Those individuals or institutions which take economic decisions and optimising their
resources by solving their choice problems in a rational manner are called economic agents.
For example, producers, consumers, government, banks etc.
 Adam Smith who is known as the father of modern economics is associated with classical
school of economic thoughts.
 Emergence of Macroeconomics
The Great Depression was a severe economic crisis that started in the year 1929. It
originated in the United States of America with the crash of the stock market and gradually
 spread to other countries of the world. The main cause behind this crisis was the fall in
aggregate demand due to under consumption and over investment.
 The cause and effect relationship of the Great Depression can be summed up
in this flow chart
Low demand → overinvestment → low level of employment → low level of
output → low income → low demand.
 The Great depression led to the failure of classical approach and paved the way for
emergence of Keynesian approach.
 Difference between Classical and Keynesian School
Classical School Keynesian School
1. Classical economists advocated for
Keynesian economists believed there always
free economy where resources are fully
exist certain level of unemployment which
utilised and the economy automatically
would not disappear automatically and
reaches to a state of full employment
hence calls for government regulations.
equilibrium.
2. These economists were strong 2. These economists strongly believed in
proponents of market and did not believe state intervention to generate employment
in state intervention. opportunities
3. The Classical school of thought 3. This Keynesian school of thought
prevails in the long run. dominates in the short run.

 Capitalist economy (or laissez-faire)

 The role of the government is limited.
 The economy is driven by the motive of profit maximisation
 The central problems of an economy are solved by the market forces of demand and
supply.
 There is a dominant role of private individuals in taking important economic decisions
like, productions etc.
 Four sectors of the economy
 CHAPTER 2
NATIONAL INCOME ACCOUNTING

 Final goods are those goods which are ready for use for final consumption. For example
wheat purchased for self consumption.
 Intermediate goods are those goods which are used for further production or for the
purpose of resale during a year for example, wheat purchased by flour industry.

NOTE: If wheat is purchased by a household, then it is considered as a final good, as it is meant for
final consumption. But if wheat is purchased by a flour industry for further processing, then it is
considered as an intermediate good.
 Consumer goods (Consumption goods) are those goods which are bought by
consumers for satisfaction of their wants. For example, vegetables used by households.
 Capital goods are those goods which are used for the production process several times,
and add to the productive capacity and to the capital stock of the country. For example,
plant and machinery
 The stock of unsold goods (finished and unfinished), which a firm carries forward from one
year to another year, is termed as inventory.
 The planned inventory refers to the expected inventory that a firm can anticipate or
plan.
 Unplanned inventory is the unexpected or unanticipated rise in inventory.
 Stock variables are measured at a particular point of time. For example, bank balance as
on 1st Oct, 2011 is Rs,5000.
 Flow variables are measured over an interval of time. For example, interest earned on
bank deposits for 1 year, i.e., from 1st Oct, 2010 to 1st Oct, 2011.
 Circular flow of income in a two sector economy
This model of the economy involves two sectors namely, households and firms. This model
depicts the activities of the above two sectors.
 Circular flow of income in a two sector economy with financial system.
The particular model of the economy comprises two sectors namely households and firms
with the involvement of financial system like banks.

 Circular flow of income in a three sector economy

The three sector model shows the activities of three sectors: households, firms,
government, with the involvement of financial system.
 Circular flow of income in a four sector economy
This model operates in the open market, where exports and imports with rest of the world
take place with the functioning of the three sectors (with the involvement of financial
system).
 Injections are those flow variables which cause addition to the circular flow of income.
These are:
 Exports
 Investments
 Consumption expenditures
 Leakages are those flow variables which cause withdrawals from the circular flow of
income. These are:
 Savings
 Imports
 Taxes imposed by the government
 For maintaining stability in the economy (at equilibrium)
Injections = Leakages
 Net factor income from abroad (NFIA) is the difference between the income received
from abroad by the residents of the country and income paid for the services rendered by
non-residents within the country.
 Components of NFIA
 Net compensation of employees
 Net income from property and entrepreneurship
 Net retained earnings of resident companies abroad
 Important Formulae:
 Gross = Net + Depreciation
or Net = Gross – Depreciation
 National = Domestic + Net factor income from abroad
 Domestic = National – Net factor income from abroad
 Market price = Factor cost + Net indirect taxes
 Factor cost = Market price – Net indirect taxes
 Net indirect taxes = Indirect taxes – Subsidies
 National income is defined as the value of all goods and services produced within the
domestic territory of a country in an accounting year.
 GDP (Gross domestic product) at market price is defined as the market value of
final goods and services produced in the domestic territory of a country during a year.

Where, NIT represents Net Indirect Taxes

NFYA represents Net Factor Income from Abroad
 Dep. represents Depreciation
MP represents Market Price
FC represents Factor Cost
NDP represents Net Domestic Product
NNP represents Net National Product
 Methods to Compute National Income
 Income Method

 Value Added or Product Method

Value added = Total value of output – Total value of intermediate consumption.

Total value of output = Quantity sold × Price per unit

However, sometimes the actual demand might not be equal to what the firms had estimated
(planned)

In such situations the stock of inventories changes

Change in Stock = Closing Stock – Opening Stock

Total value of output = Value of sales + Value of change in stock

GVA1 + GVA2 + …+ GVAn

where,

GVA1 represents gross value added by 1st firm

GVA2 represents gross value added by 2nd firm

GVAn represents gross value added by nth firm

n

 GVA  GDP
i 1
i MP

        
GDPMP   Depreciation  NDPMP   Net Indirect Taxes  NDPFC   NFIA  NNPFC
 Expenditure Method or Final Consumption Method
 CHAPTER 3
MONEY AND BANKING

 Barter system is the system used for exchange of one commodity for another before the
money came in existence. For example, if a person having rice wants tea, then he can
exchange rice with a person who needs tea.
 Drawbacks of Barter System
 Problem of double coincidence of wants
 Lack of common unit of value
 Difficulty in wealth storage
 Lack of standard of deferred payments.
 Money is commonly used as a medium of exchange.
 Functions of money
 Medium of exchange
 Unit of value
 Store of value
 Standard of deferred payments
 Transfer of value
 Legal tender refers to the currency notes and coins being issued by the monetary
authorities of a country. In India, (RBI and government of India together comprises of
monetary authorities) issues legal tender.
 Fiduciary money is the money that is backed by trust between payer and payee.
 Fiat money is money that derives its value only because of government order (fiat). The
currency becomes fiat money when the government declares it to be a legal tender
 Full bodied money refers to that money whose intrinsic value (value of the metal) is
equal to the face value of the engraved on the currency.
 Credit money refers to the money whose money value is more than commodity value,
like a Rs 1000 note.
 Transaction demand for money refers to the demand of money for meeting day to day
transactional needs.
The transaction demand for money in an economy (MdT) can be written as
MdT = K T
1 d
or MT=T
K
or v MdT = T
1
where, v  , represents velocity of circulation of money
K
T = Total value of transactions in the economy over a period of time
K = a positive fraction
MdT = Stock of money that people are willing to hold at a particular point of time for
transactions.
 Speculative demand for money is the demand for money for meeting the speculative
needs.
 Liquidity trap is such a situation in which speculative demand function is infinite elastic.

When r = r min, the economy is in liquidity trap

 Money supply refers to the total stock of money held by the people at a point of time.
 M1, M2, M3, M4 are arranged in the descending order of liquidity.
 Commercial banks are those institutions which receive deposits from and forward loans
to the public for meeting various needs.
 Functions of commercial banks
 Accepting deposits
 Granting loans and advances
 Agency functions
 Discounting bills of exchange
 Credit creation
 Other functions
 High powered money is the total liability of the monetary authority of the country.
H=C+R
Where, H represents high powered money
C represents currency
R represents cash reserves of banks
 Money multiplier is the ratio of the stock of money to the stock of high powered money
in an economy
M
i.e. M M 
H
Where, MM is money multiplier
M represents stock of money
H represents high powered money
 Central Bank is the apex institution of a country’s monetary system. In India, RBI is the
central bank.
 Functions of Central bank
 Issues currency
 Banker’s bank
 Banker to government
 Custodian of foreign exchange reserves
 Lender of last resort
 Controller of credit
 Instruments of monetary policy

 Bank rate is the rate at which central bank provides loans to the commercial banks.
 Cash reserve Ratio (CRR) refers to the minimum amount of funds that the
commercial banks have to maintain with RBI in the form of deposits.
 Statutory Liquidity Ratio (SLR) is defined as the minimum percentage of assets to
be maintained by the commercial banks with the central bank in the form of either fixed
or liquid assets.
 Open Market Operations (OMO) refers to the buying and selling of securities
either to the public or commercial banks in an open market, in order to vary money
supply in the economy.
 Selective Credit Control is the flow of credit to particular sectors in the positive and
negative aspect.
  Margins (difference between the market value of security and loan value) are kept by
the central bank to grant loans against the securities being mortgaged.
 Moral suasions- The central bank morally persuades and requests the commercial
banks to expand or contract credit and also advices them regarding various policy
measures and changes (if required).
 Effect of money supply on instruments of monetary policy
VARIOUS SLR
CRR OMO
INSTRUMENTS BR (Statutory
(Cash Reserve (Open Market
OF MONETARY (Bank Rate) Liquidity
Ratio) Operations)
POLICY Ratio)

Buying of
↑ BR→ Ms ↓ ↑CRR→ Ms ↓ ↑ SLR→ Ms↓
securities→ Ms↓
EFFECTS ON
MONEY SUPPLY
Selling of
↓BR→ Ms↑ ↓CRR→ Ms↑ ↓SLR→ Ms↑
securities→ Ms↑

→ represents leads to
↓ represents decreases
↑ represents increases
 The instruments of money creation used by the RBI for stabilising the stock of money in the
economy to protect from external shocks are referred as sterilisation policy.
 CHAPTER 4
INCOME DETERMINATION

 Aggregate demand (AD) refers to the aggregate expenditure on the purchase of goods
and services (domestically produced) during an accounting year.
AD  C  I  G  X  M
where, C represents private consumption expenditure
I represents private investment expenditure
G represents government expenditure (both consumption and investment)
X–M represents net exports
 Aggregate supply (AS) refers to the aggregate production planned by all the producers
during an accounting year.
That is, AS = C + S
Where, C represents aggregate private consumption expenditure
S represents aggregate savings
 Ex-ante investment refers to the planned or intended investment during a particular
period of time.
 Ex-post investment refers to the actual level of investment during a particular period of
time.
 Consumption function refers to the relationship between consumption (C) and income
(Y) in the economy.
C  C  bY
where, C represents consumption
C represents autonomous consumption (C when Y = 0)
b represents MPC
Y represents Income
 Average Propensity to consume is the ratio of consumption expenditure to a level of
income
 C
APC 
Y
 Fundamental Psychological Law states that the consumption does not increase at a rate
in which income increases.
 Marginal propensity to consume refers to the ratio of change in the consumer’s
expenditure due to the change in disposable income
C
MPC 
Y
Where, C represents change in consumption
Y represents change in income
 Saving function refers to the relationship between savings (S) and income (Y).
S   S  sY
where, S represents savings
S represents autonomous savings
s represents MPS
Y represents income
 Average propensity to save is the ratio of savings to a level of income.
S
APS 
Y
 Marginal propensity to save refers to the ratio of change in savings due to the change
in the disposable income (Yd).
S
MPS 
Yd

 Sum of MPC and MPS is always equal to unity i.e.

MPC  MPS  1
 Determination of Equilibrium Income/ Output
 AD and AS approach
 According to this approach, the equilibrium level of income is determined by the point
where aggregate demand is equal to aggregate supply. Point E is the equilibrium where,
AS (45 line) intersects AD. OQ represents equilibrium output.

 S and I approach (Savings and Investments)

According to this approach, the equilibrium is determined where the savings and
investment are equal to each other. E is the equilibrium under this approach.

 Investment multiplier (output multiplier) shows how a change in investment causes a

multiple change in national income.
Y
Multiplier (K ) 
I
 Relationship between MPC, MPS and Multiplier
Y 1 1
Multiplier (K )   
I 1  MPC MPS
 When Aggregate Demand exceeds Aggregate Supply (AD > AS)
 In case, if AD > AS, then it implies a situation, where the total demand for goods and
services is greater than the total supply of the goods and services.

AD > AS Excess Demand Producers draw down their inventories and increase
production Increase in employment of factors of production  Employment level and
Income rises  Income rises sufficiently to equate AD with AS  Equilibrium Restored.

 When Aggregate Supply exceeds Aggregate Demand (AS > AD)

In case, if AS > AD, then it implies a situation, where the total supply of goods and services is
greater than the total demand for the goods and services.

AS > AD Deficit Demand Producers experience piling up of stock or inventory

accumulation Decrease in employment of factors of production  Employment Level and
Income Falls  Income and Output Fall Sufficiently to equate AD with AS  Equilibrium
Restored.

 When Savings exceed Investments (S > I)

The situation when saving exceeds investment implies a situation where withdrawal from the
circular flow of income is greater than injections into the circular flow of income.

S > I  Total consumption expenditure is less than what is required to purchase the available
supply of goods and services  A portion of the supply remains unsold  Unplanned
inventory accumulation  Producers plans a cut in the production and employment of factors
of production  Aggregate Income in the economy falls  Aggregate saving falls  Savings
fall sufficiently to equate S with I  Equilibrium restored.

 When Investments exceed Savings (I > S)

The situation when investment exceeds saving implies a situation where injections into the
circular flow of income is greater than withdrawals from the circular flow of income.
I > S  Total consumption expenditure is greater than what is required to purchase the
available supply of goods and services  Unplanned inventory depletion  Producers plans
to increase production and employment of factors of production  Aggregate Income in the
economy rises  Aggregate saving rises  Saving rises sufficiently to equate S with I 
Equilibrium restored.

 Deficit demand is a situation which occurs when the actual or equilibrium level of
Aggregate Demand (ADE) falls short of the full employment level of output (ADF).

i.e. if, ADE < ADF (situation of Deficit Demand)

Due to Deficit Demand, there exists a difference (gap) between the full employment level of
Aggregate Demand and actual level of demand. This difference is termed as Deflationary
Gap.
 Deflationary Gap = EY – CY = EC
 Excess demand is a situation where the actual Aggregate Demand for output (ADE) is
more than the full employment level of output (ADF)

i.e. if, ADE > ADF (situation of Excess Demand)

Due to Excess Demand, there exists a difference (gap) between the actual level of
Aggregate Demand and full employment level of demand. This difference is termed as
Inflationary Gap.

Inflationary Gap = FY – EY = FE
 Fiscal policy is the policy undertaken by the government to influence the economy
through the process of expenditure (government expenditure, subsidies and transfer
payments) and revenue collection (taxation).
 Monetary policy is the policy under which the monetary authorities through its measures
(like bank rate, CRR, SLR, margin requirements, SCC and moral suasions) affects the
money supply in the economy.
 Effective demand refers to a situation in which equilibrium output is determined solely
by the level of aggregate demand.
 Say’s law of market states that ‘supply creates its own demand’. This implies that the
quantity produced will always be demanded in the market. There will be full employment
of income and product.
 CHAPTER 5
GOVERNMENT BUDGET

 Government budget is a statement showing expected government receipts and payments

during a particular financial year.
 Objectives of a government budget
 Redistribution of income and wealth
 Economic stability
 Reallocation of resources
 Managing public enterprises
 Components of the budget

 Budget receipts refer to estimated receipts of the government during a particular

fiscal year from all sources.
  Revenue receipts are those receipts of the government which neither creates any
liability nor it causes any reduction in the assets of the government.
 Capital receipts refer to those receipts which cause a reduction in the government
assets and also create liability for the government.
 Budget expenditure refers to estimate expenditure of the government during a
particular fiscal year.
 Revenue expenditures are those government expenditures which do not cause any
reduction in liability and also do not create assets for the government.
 Capital expenditure is that expenditure of the government that causes reduction in
liabilities as well as creates assets for the government.
 Direct taxes are the taxes which are borne by the person on whom it is imposed. An
example of the same is income tax.
 Indirect tax is that tax in which burden of tax shifts from payer to bearer. For example,
sales tax is borne by the customers but is paid by the seller.
 Development expenditures are those expenditures that directly relates to the growth
and developmental activities of the government. For example, expenditure on roads.
 Non-development expenditures are those expenditures which are not linked with the
flow of goods and services in the economy. For example, expenditure on collection of
taxes.
 The expenditure which is incurred by the government to meet its planned programs is
termed as planned expenditure. For example, expenditure on health and education
sectors etc.
 Non-plan expenditure refers to those expenditures which are not planned for example,
relief to earthquake victims.
 Budget deficit is the excess of total expenditure over total receipts. Three types of
budget deficit are:
 Revenue deficit (RD)
It is the excess of revenue expenditure over revenue receipts.
 RD = RE – RR,
Where,
RE = Revenue expenditure
RR = Revenue receipts
 Fiscal deficit
It is the difference between total expenditure and total receipts of the government
Gross fiscal deficit = Total expenditure – Total receipts
Where,
Total receipts = Revenue receipts + Non-debt creating capital receipts
OR
Gross fiscal deficit = Net domestic borrowings + Borrowings from RBI + Borrowings
from abroad
 Primary deficit
It is the difference between fiscal deficit and interest payments.
Primary deficit = Fiscal deficit – Interest payments
 Balanced balance is that budget in which government receipts are equal to government
expenditure.
 Surplus budget is the budget wherein government receipts are greater than government
expenditures.
 Deficit budget is a budget in which government expenditure are greater than government
receipts.
 Balanced budget multiplier is defined as the ratio of increase in income to increase in
government expenditure financed by taxes.
Y Y
 1
G T
Where
Y represents change in income
G represents change in government expenditure
 T represents change in tax
 Fiscal policy is the policy undertaken by the government to influence the economy
through the process of expenditure and revenue collection (taxation).
 Ways to reduce deficit in government budget can be in two ways, namely:
 By decreasing expenditure
 By increasing receipts
 Types of Multiplier
Y 1 1
K  
I 1  c s

Where,

c represents marginal propensity to consume

Investment multiplier (in two sector
model) s represents marginal propensity to save

K represents investment multiplier

Y represents change in income

I represents change in investment

Y 1 1
GM   
G 1  c s
Government expenditure Where,
multiplier (in three sector model)
GM represents government expenditure multiplier

G represents change in government expenditure

Y c
TML  
T 1  c
Lump-sum tax multiplier (in three Where,
sector model)
TML represents lump-sum tax multiplier

T represents change in lump-sum tax

 Y 1
TMP  
t 1  c(1  t )

Where,
Proportionate tax multiplier (in
three sector model) TMP represents proportionate tax multiplier

t represents change in proportionate tax

t represents proportionate tax rate

Y c
TRM  
TR 1  c
Transfers multiplier (in three sector Where,
model)
TRM represents transfers multiplier

TR represents change in transfer payments

Y 1
FTM  
X 1  c(1  t )  m

Where,
Foreign Trade multiplier (in four FTM represents foreign trade multiplier
sector model)
X represents change in exports

m represents marginal propensity to import

t represents proportionate tax rate

Balanced budget multiplier (in BBM  GM  TMP

Y Y 1 c
three sector model)     1
G T 1  c 1  c
 CHAPTER 6
OPEN MARKET MACROECONOMICS

 Balance of Payment (BoP) refers to the statement of economic transactions of a country

with the rest of the world.
 Visible items in balance of payment account include all types of physical goods
exported and imported.
 Invisible items in BoP account include all types of services.
 Balance of trade (BoT) takes into account only the visible items whereas Balance of Payment
(BoP) includes both visible as well as invisible items.
 Current account is the account which maintains the records of imports and exports of
goods and services as well as unilateral transfers.
 Components of current account
 Export and Import of goods
 Export and Import of services
 Unilateral Transfers
 Capital account refers to that account which records all the transactions which causes
change in assets or liabilities of the government or residents.
 Components of capital account
 Foreign Direct investment (FDI)
 Portfolio Investment
 Loans
 Other Investments
 Autonomous items refer to those economic transactions which are motivated by profit
consideration. For example, imports and exports of goods and services and inflow and
outflow of capital due to the interest differentials. Autonomous items are referred to as
 ‘items above the line’ in BoP. These items when included in the accounts do not affect BoP
of a country.
 Those transactions that take place due to some other motive (except profit earning) are
termed as accommodating items of BoP. These items are use to correct BoP
disequilibrium. For example, government financing, injecting or withdrawing from official
reserves through special drawing rights and foreign exchange reserves. They are often
referred as ‘below the line items’

 The transactions carried by monetary authority of a country, which cause changes in official
reserves, are termed as official reserve transactions.
 Foreign exchange rate is the rate at which the price of one currency is measured in
terms of another currency.
 Nominal exchange rate is the price of one currency in terms of another.
 Real exchange rate is the ratio of foreign prices to domestic prices.
ePf
Real exchange rate =
P
Where
Pf represents prices level of foreign currency
P represents price level of domestic currency
e represents nominal exchange rate
 Nominal effective exchange rate (NEER) measures the strength of one currency in
terms of another without taking into account the changes in price level.
 Real effective exchange rate (REER) determines the strength of one currency in terms
of other with the consideration of changes in price level across different countries of the
world.
 Purchasing power parity refers to the ratio of the price levels in different countries this
indicates the ratio of purchasing power of trading countries.
Px
R
Py

Where R represents rate of exchange

Px represents price level in country X
Py represents price level in country Y
 Under flexible exchange rate (floating exchange rate), the rate of exchange is
determined by the market forces; i.e. demand and supply.
In the figure given below, DD represents the demand for currency and SS represents the
supply of currency.

The equilibrium exchange rate is determined by the intersection of the demand and supply
curves, i.e. ‘OR’ which represents the equilibrium exchange rate under floating exchange
rate regime.
 Under fixed exchange rate (or pegged exchange rate), the exchange rate was held
constant or fixed by the monetary authorities. Under this regime, the value of different
currencies was pegged to the value of one single currency. This system avoids frequent
 fluctuations in the exchange rate and made international trade more predictable and ensures
guarantee returns to the exporters.
 Under Bretton Woods System, the monetary authorities of different countries (other
than USA) pegged (fixed) maintained fixed exchange rate among their currencies and USD
($) by intervening in the foreign exchange market. In case the value of currency is lower
compared to the value of USD, then the monetary authorities of that country will buy its
own currency in exchange of USD in the foreign exchange market, which pulls up the price
of the currency. On the other hand, if the value of currency is high compared to that of
USD, then the monetary authorities will sell its own currency in exchange of USD, which
will push down the value of country’s currency.
 Devaluation occurs when the price of currency is officially decreased under fixed
exchange rate system.
 Currency depreciation of domestic currency implies that the domestic currency has
become less expensive in terms of foreign currency. Decrease in the price of domestic
currency in terms of foreign currency under flexible exchange rate regime is called
depreciation.
Exchange Rate Value of Re 1 in terms of USD Change

1
USD 1 = Rs 45  0.022
45

Indian rupee
depreciated as the value
1
USD 1 = Rs 50  0.020 of rupees in terms of
50 dollar fell from 0.022 to
0.020
Indian rupee
appreciated as the value
1
USD 1 = Rs 40  0.025 of rupees in terms of
40 dollar fell from 0.022 to
0.025
 Currency appreciation of domestic currency implies that the domestic currency has
become more expensive in terms of foreign currency. Increase in the price of domestic
currency in terms of foreign currency under flexible exchange rate regime is called
appreciation.
 Managed floating system is combination of two systems–fixed and floating. It calls for
government or central bank to intervene when the need for the same is realised. This is
done with the help of purchase and sell of foreign currency to moderate exchange rate
movements.
 Hedging is a process of protecting the interest of both buyers and sellers against the
fluctuations in the exchange rate in the context of forward market.
 Foreign Trade multiplier (Open economy multiplier)
Y 1
FTM  
X 1  c(1  t )  m
Where,
FTM represents foreign trade multiplier
X represents change in exports
m represents marginal propensity to import
t represents proportionate tax rate
c represents marginal propensity to consume