Short Notes

01 · Meaning of Macroeconomics & Micro vs Macro Unit 1 · Lec 1

1. Micro looks at parts, macro looks at the whole. Microeconomics studies small individual units — a single consumer, a single firm, a single industry, a single market. Macroeconomics studies the economy of the whole country taken together.
2. Different questions. Microeconomics asks how the price of one product is fixed and how resources are shared between different uses. Macroeconomics asks what decides the country's total income, total employment and the general price level.
3. Ackley's distinction (write this line, it is the standard one). Macroeconomics concerns the aggregate volume of output, the extent to which resources are employed, the size of national income and the general price level; microeconomics concerns the division of total output among industries, products and firms, and the allocation of resources among competing uses.
4. Price vs price level. Microeconomics explains relative prices — the price of wheat compared with the price of cloth. Macroeconomics explains the general price level — whether prices on the whole are rising or falling.
5. Method of study. Microeconomics uses partial equilibrium analysis, holding other things constant. Macroeconomics uses general equilibrium analysis, because the sectors of an economy depend on one another.
6. Policy use. Microeconomics guides the decisions of a firm or a household. Macroeconomics guides government policy — fiscal policy, monetary policy and growth planning.
7. They are not rivals; they complete each other. A full understanding of an economy needs both, because the behaviour of the whole is not always the sum of the behaviour of the parts.

• Example sentence (this is what the official answer key asks for): microeconomics studies how a single firm fixes the price of its product, while macroeconomics studies what causes inflation in the whole country.
• Origin. Modern macroeconomics was born out of the Great Depression of 1929–33, when unemployment in the United States rose to about 25 per cent of the labour force.
• Say's Law and the Keynesian Revolution. Classical economists relied on Say's Law — "supply creates its own demand" — and therefore denied that involuntary unemployment could last. J. M. Keynes refuted this in The General Theory of Employment, Interest and Money (1936), showing that income and employment are set by aggregate demand and aggregate supply and that equilibrium can settle far below full employment. This change in thinking is called the Keynesian Revolution.

Full treatment → Unit 1 · What is Macroeconomics

02 · Subject Matter, Features & Importance of Macroeconomics Unit 1 · Lec 3

1. Theory of income and employment. It explains what fixes the level of national income and employment at any time, and why an economy can settle at less than full employment. Under it come the theory of the consumption function and the theory of investment.
2. Theory of the general price level. It explains what makes the average of all prices rise or fall, and therefore explains inflation and deflation.
3. Theory of economic growth. It explains how a country raises its productive capacity and its national income over a long period, which depends on saving, investment, human capital and technology.
4. Theory of economic policy. It explains how the government can use fiscal policy and monetary policy to remove unemployment, control inflation and speed up growth.

1. It is an aggregate study. It works with totals and averages — total output, total demand, total supply, total employment — not with a single unit.
2. It stresses interdependence. It studies how households, business firms, the government and the foreign sector act on one another, so a change in one sector spreads to the rest.
3. It is policy oriented. Its main purpose is practical: to give the government a basis for framing fiscal and monetary policy that keeps the economy stable.
4. It is dynamic. It studies both short-run ups and downs (business cycles) and the long-run upward trend (economic growth).
5. It is general-equilibrium in method. Because everything depends on everything else, macroeconomics cannot assume "other things remaining the same" the way microeconomics does.
6. It works through aggregate demand and aggregate supply. These two forces are the engine of the whole subject, exactly as demand and supply of one good are in microeconomics.

1. It measures the overall performance of the economy. National income and GDP figures tell us whether the country as a whole is better off than last year.
2. It explains the big problems that hurt people. Unemployment wastes resources and causes misery; inflation erodes real incomes, shifts income towards the rich and pushes more people below the poverty line.
3. It is the basis of government policy. Only by knowing the causes of recession and inflation can a government design expansionary policy in a slump and tight policy against inflation.
4. It guides economic planning. Targets for growth, saving and investment in a plan are all set in macroeconomic terms.
5. It helps individuals decide. A person who expects higher inflation can act in advance to protect real income and real interest earnings; decisions such as buying a house or a car depend on the expected state of the economy.
6. It helps business managers. Firms do not work in a vacuum — the overall business environment is made of the trend in GDP, aggregate demand, saving and investment, the price level, employment, international factors and government policy.

• Say clearly that macroeconomics is needed as a separate subject because what is true of the part is not true of the whole — this is the fallacy of composition, and it is the real justification of the subject (see topic 04).
• Name the standard aggregates by name at least once: national income, aggregate demand, aggregate supply, total employment, general price level, rate of growth.

Full treatment → Unit 1 · What is Macroeconomics and Importance of Macroeconomics

03 · Six Major Issues and Concerns of Macroeconomics Unit 1 · Lec 2

1. Unemployment. Macroeconomics explains what decides the level of employment and therefore what causes involuntary unemployment. Keynes showed that with aggregate supply fixed in the short run, it is a deficiency of aggregate demand that leaves the economy in underemployment equilibrium, and that swings in private investment cause cyclical unemployment.
2. Recession and national income. National income or GNP shows the performance of the economy and decides the general standard of living. In a recession the actual level of national income falls below its potential level, and the gap between the two measures the output that has been lost.
3. Inflation. Classical economists said the price level is fixed by the quantity of money. Keynes argued the opposite way round: just as too little aggregate demand causes unemployment, too much aggregate demand causes inflation — this is the demand-pull theory. The cost-push and structuralist theories were added later.
4. Business cycles. Output and employment do not grow smoothly; they alternate between boom and recession. A severe recession is called a depression. Explaining and controlling these swings is a central macroeconomic concern.
5. Stagflation. In the 1970s the industrial countries faced a harder problem: recession and high unemployment existed together with rapid inflation. Keynesian demand-side theory could not explain this combination, and a new school called supply-side economics grew out of the failure.
6. Economic growth. Growth means a sustained rise in national income or per-capita income over a long period. It depends on the growth of physical capital, human capital and technology, and therefore on the rates of saving and investment.
7. Balance of payments and exchange rate (add as the seventh). Instability in exchange rates and deficits in the balance of payments have become serious problems in recent years, especially for developing countries.

• Pair the goals with the indicators. The three goals of macro policy are full employment, price stability and growth. You read full employment off the unemployment rate, price stability off the inflation rate, and growth off real GDP. Saying this shows you understand what policy is for.
• Keynes' symmetry in one line: deficient aggregate demand → unemployment; excessive aggregate demand → inflation. This single sentence links issues 1 and 3 and is worth a mark on its own.

Full treatment → Unit 1 · Major Issues and Concerns

04 · Why Macroeconomics Is Studied Separately — The Paradoxes Unit 1 · Lec 2

1. The paradox of thrift. For a single household, saving more is clearly good — it becomes richer. But if everyone in the economy decides to save more at the same time, consumption demand falls, firms sell less, output and income fall, and the community may end up saving the same amount or even less. Virtue for one becomes vice for all.
2. The wage-employment paradox. A single firm that cuts wages lowers its costs and can employ more workers. But if all firms cut wages together, the total income of workers falls, aggregate demand for goods falls, and firms therefore need fewer workers — so employment can fall instead of rising.
3. Both are cases of the fallacy of composition. The mistake in both is assuming that what holds for one unit, other things being equal, still holds when every unit does the same thing — because then other things are no longer equal.
4. Boulding's forest analogy. Boulding said that studying the whole economy by studying single firms is like trying to understand a forest by examining single trees — you can describe every tree perfectly and still miss the forest.
5. Conclusion for the exam. Because of these paradoxes, the economy as a whole must be studied with its own tools and its own theory. Microeconomics alone cannot do it, and this is the real justification for macroeconomics as a separate branch.

• Link the paradox of thrift to Keynes' central message: in a depression, an increase in the desire to save reduces income — which is why the cure for depression is more spending, not more thrift.
• Say that this is also why Keynes rejected the classical belief that a fall in wages would automatically restore full employment.

Full treatment → Unit 1 · Why a Separate Study

05 · Role of Government in the Macroeconomy Unit 1 · Lec 4

1. Fiscal policy — taxation and government spending. Before Keynes it was believed that the budget should always be balanced. Keynes showed that a balanced budget is not right in every situation: in a depression the government should deliberately make a deficit budget, spending more than it takes in, which raises aggregate demand, national income and employment. Against high inflation it should cut expenditure or raise taxes to make a surplus budget.
2. Monetary policy — money supply, credit and the rate of interest. To check inflation the central bank adopts a tight money policy: it raises the rate of interest, reduces the availability of credit, raises the cash reserve ratio and sells government bonds. To cure recession it adopts an expansionary policy: it increases money supply and lowers the interest rate so as to encourage investment and consumption.
3. Supply-side policy — raising aggregate supply instead of managing demand. Taxes are cut to strengthen the incentive to work, save and invest, so that output rises and the price level falls at the same time. This approach was adopted when the United States and Britain faced stagflation in the 1970s, because demand management alone could not cure high inflation and high unemployment together.

1. Stabilisation. Through fiscal and monetary policy it smooths the business cycle, fighting recession on one side and inflation on the other. This is its most important macroeconomic role.
2. Allocation of resources. It provides public goods such as defence, roads and law and order that the market will not supply, and corrects the market where private and social costs differ.
3. Redistribution of income. Through progressive taxes on the rich and transfer payments, subsidies and welfare spending on the poor, it reduces inequality.
4. Promotion of economic growth. Through public investment in infrastructure, education and health it raises the country's productive capacity.
5. Regulation. Through laws and regulatory bodies it controls monopoly, protects consumers and workers, and keeps the financial system sound.

• Crowding out. When the government borrows to finance a deficit, the rate of interest rises and some private investment is squeezed out. So the net effect of fiscal expansion is smaller than the direct effect.
• Inflation risk of printing money. The alternative to borrowing is financing the deficit with newly created money, but the danger is that this leads to inflation.
• Adding these two qualifications is exactly what turns a 3-mark answer into a 5-mark one.

Full treatment → Unit 1 · The Role of Government

06 · Circular Flow of Income — Two, Three and Four Sector Models Unit 2 · Lec 5

1. Two flows run in opposite directions. The real flow is of factor services going from households to firms and of goods and services going from firms to households. The money flow is of factor payments (wages, rent, interest, profit) going from firms to households and of consumption expenditure going back from households to firms.
2. Two-sector model — households and firms only. Households own all factors and spend their entire income on goods; firms produce and pay out all their receipts as factor incomes. Here national income = national output = national expenditure, and the flow stays constant as long as households spend everything they earn.
3. Saving breaks the simple circle. In reality households save part of their income, so not all income comes back as consumption spending. Saving is a leakage or withdrawal from the flow.
4. Investment puts it back. Firms borrow the savings through the capital market and spend them on capital goods. Investment is an injection into the flow. The two-sector flow stays constant only when planned saving = planned investment.
5. Three-sector model — add the government. The government takes taxes out of the flow (a leakage) and puts government expenditure back in (an injection), including transfer payments to households and purchases from firms.
6. Four-sector model — add the foreign sector. Imports are a leakage because money goes out to foreigners; exports are an injection because money comes in from foreigners. This is the open economy.
7. The condition for a constant flow. In the four-sector model the circular flow stays at the same level when total leakages equal total injections.

• Classical vs Keynes on S = I. Classical economists said the rate of interest automatically makes saving equal investment. Keynes denied it, because the people who save are not the people who invest and they save and invest for different reasons — so planned saving and planned investment can differ, and that difference is a cause of fluctuations.
• Planned vs actual. Planned saving and planned investment can differ. Actual saving and actual investment are always equal, because unsold output counts as unintended inventory investment.
• Crowding out from the identity. Read G − T = S − I: if the government runs a budget deficit (G > T) and saving does not rise, then I must fall — the government's borrowing has crowded out private investment.
• National saving. S_national = private saving (Y − T − C) + public saving (T − G).

Full treatment → Unit 2 · Circular Flow of Income

07 · Leakages and Injections — Effects on the Economy Unit 2 · Lec 6

1. They raise aggregate demand directly. Every rupee of investment, government spending or export earning is a rupee of demand for domestically produced output.
2. They work through the multiplier. The first round of extra spending becomes somebody's income; that person spends a part of it, which becomes somebody else's income, and so on. So national income rises by a multiple of the original injection.
3. They raise output and employment. Higher demand makes firms produce more and hire more workers, which is why injections are the standard cure for recession.
4. Investment also raises future capacity. Investment is special: besides adding to demand today, it adds to the stock of capital, so it raises the economy's productive capacity and long-run growth.
5. Government expenditure can be directed. It can be aimed at infrastructure, education and health, so it raises demand now and productivity later, and it can be aimed at poorer regions and groups.
6. Exports bring in foreign exchange. Export earnings finance imports of essential raw materials and machines and strengthen the balance of payments.

1. They reduce the flow of income. Income that is saved, taxed away or spent on foreign goods does not return to domestic firms as demand, so the circle shrinks.
2. They work through the multiplier in reverse. A leakage causes a multiple contraction in national income, not just a one-for-one fall.
3. Excess saving causes unemployment. If planned saving exceeds planned investment, aggregate demand is deficient, goods pile up unsold, firms cut production and involuntary unemployment appears. This is the paradox of thrift at work.
4. Heavy taxation reduces disposable income and incentive. High taxes cut the income households have left to spend and can weaken the incentive to work, save and invest.
5. High imports worsen the balance of payments. If imports persistently exceed exports there is a trade deficit and pressure on the exchange rate and on foreign-exchange reserves.
6. But leakages are not simply bad. Saving is the source from which investment is financed, and taxes are the source from which the government finances development spending. The problem is not their existence but an imbalance between leakages and injections.

Full treatment → Unit 2 · Circular Flow of Income

08 · National Income — Concepts and Accounting Unit 2 · Lec 7

1. GDP (Gross Domestic Product) is the market value of all final goods and services produced within the geographical boundary of a country in one year.
2. GNP (Gross National Product) is the value of final output produced by the residents of a country, wherever they are. GNP = GDP + net factor income from abroad.
3. NDP and NNP are the "net" versions, arrived at by subtracting depreciation — the wear and tear of capital used up in producing the output.
4. National Income is NNP measured at factor cost, that is, market prices minus net indirect taxes. This is the income actually earned by the factors of production.
5. Personal Income is the income actually received by households, so undistributed corporate profits, corporate taxes and social security contributions are deducted from national income and transfer payments are added.
6. Personal Disposable Income is personal income minus personal direct taxes — the money households can actually use, and it is either consumed or saved.
7. Nominal vs real. Nominal GNP is measured at current prices and rises when prices rise; real GNP is measured at constant base-year prices and rises only when output rises. The GNP deflator converts one to the other and is itself a measure of the price level.

1. It helps us understand the structure and complexity of the economy — how much each sector contributes and how the sectors are linked.
2. It captures the major economic flows — production, income and expenditure — and the relationships between the parts of the economy.
3. It provides a simplified framework in which those interrelationships can be studied and forecast.
4. It provides the basis for evaluating policy — you cannot judge whether a policy worked without measuring what happened to income, consumption and investment.
5. It provides the framework for long-term planning, since plan targets for growth, saving and investment are all set in national income terms.
6. It allows comparison over time and between countries, and per-capita income allows a rough comparison of living standards.

Full treatment → Unit 2 · Concepts of National Income

09 · Measurement of National Income and Its Limitations Unit 2 · Lec 7

1. Value added or product method. Add the value added by every producing unit in the economy. Value added = value of output − value of intermediate goods bought from other firms. Only the value added at each stage is counted, so nothing is counted twice.
2. Income method. Add all the incomes earned by the factors of production — wages and salaries (compensation of employees), rent, interest, and profit — plus mixed income of the self-employed. The total is national income at factor cost.
3. Expenditure method. Add all final expenditure on domestically produced output: private consumption (C), investment (I), government expenditure (G) and net exports (X − M).

1. Count only final goods, never intermediate goods, otherwise there is double counting.
2. Exclude the sale of second-hand goods, because they were counted in the year they were produced — but include the broker's commission on them, since that is a service produced this year.
3. Exclude purely financial transactions such as buying shares and bonds, because no new output is created.
4. Exclude transfer payments such as pensions, scholarships and unemployment benefit, because nothing is produced in return.
5. Include imputed values — the imputed rent of an owner-occupied house and the value of output kept by farmers for their own use.
6. Include the change in stock (inventory) as investment, and value output at the same set of prices throughout.

1. Non-market activities are left out. The services of a housewife, self-help work and other unpaid services do not have a market price and so are not counted, even though they add to welfare.
2. The unorganised and black economy is understated. In a developing country like India a large part of activity is unrecorded, so the true figure is higher than the measured one.
3. It ignores the distribution of income. Two countries with the same national income can be very different if in one the income is shared evenly and in the other it is concentrated in a few hands.
4. It ignores the composition of output. Output of arms and output of food both add to GDP, but they do not add equally to welfare.
5. It ignores leisure. If people produce the same output while working fewer hours they are better off, but GDP does not change.
6. It ignores pollution and other externalities. Production that damages the environment adds to GDP, and the damage is not subtracted.
7. It counts "regrettable" expenditure as a good. Spending on police, law courts and defence is counted as output, though it is really a cost of maintaining society rather than a gain in welfare.

• Net Economic Welfare (NEW). To correct these defects, economists suggested adjusting GNP by adding the value of leisure and non-marketed services and deducting pollution and regrettable costs. Naming this concept shows you know the standard answer to "GDP is not welfare".
• Practical difficulties in India worth one line: illiteracy and non-maintenance of accounts by small producers, a large non-monetised subsistence sector, and unreliable data.

Full treatment → Unit 2 · Measurement of National Income

10 · Consumption Function — APC and MPC Unit 2 · Lec 11

1. APC is the ratio of total consumption to total income. It answers: out of every rupee of income the household has, how much of it in total is being consumed?
2. MPC is the ratio of the change in consumption to the change in income. It answers: out of one extra rupee of income, how much extra is spent?
3. MPC always lies between 0 and 1. It cannot be negative, because people do not reduce consumption when income rises; and it cannot exceed 1, because they cannot spend more than the whole of the extra income.
4. In the linear Keynesian function MPC stays constant while APC falls as income rises, because the fixed autonomous part a becomes a smaller and smaller share of a growing income.
5. Therefore MPC is always less than APC. This is a favourite one-mark point and follows directly from the previous one.
6. MPC is the key to the multiplier. The higher the MPC, the larger the multiplier and the bigger the effect of any injection on national income — which is why MPC matters for policy, not just for arithmetic.
7. MPC is generally higher for poorer households and lower for richer ones, since the poor must spend most of any extra income on necessities.

• Income on the X-axis, consumption on the Y-axis, with a 45° line along which C = Y.
• The consumption curve starts above the origin at height a and is flatter than the 45° line.
• Where the consumption curve cuts the 45° line is the break-even income: consumption exactly equals income and saving is zero.
• To the left of that point C > Y, so there is dissaving — households live off past savings or borrowing.
• To the right of it Y > C, and the widening vertical gap between the 45° line and the consumption curve is saving.

Full treatment → Unit 2 · Consumption Function · practice sums on the Numerical Lab

11 · Saving Function and Investment Function Unit 2 · Lec 12

1. Saving is a residual. S = Y − C, so the saving function is derived directly from the consumption function and needs no separate assumption.
2. The intercept is negative. At zero income saving is −a, that is, there is dissaving equal to autonomous consumption, financed out of past savings or borrowing.
3. MPS = 1 − MPC. Any extra rupee of income is either spent or saved, so the two marginal propensities must add up to one. The same logic gives APC + APS = 1.
4. APS rises as income rises, exactly because APC falls. Richer households save a larger proportion of their income.
5. MPS lies between 0 and 1 for the same reason that MPC does.
6. MPS decides the size of the multiplier, since the multiplier equals 1 ÷ MPS. A high propensity to save means a small multiplier and a weaker effect of any injection.

1. Investment means addition to the stock of real capital — plant, machinery, buildings and inventories — not the buying of shares, which is only a transfer of ownership.
2. Investment depends on two things: the rate of interest (the cost of borrowing funds) and the marginal efficiency of capital, which is the expected rate of profit from an extra unit of capital.
3. A firm invests as long as MEC exceeds the rate of interest. It stops where MEC = r, so the investment demand curve slopes downwards against the rate of interest.
4. Inverse relation with the interest rate. A fall in the rate of interest makes more projects profitable, so investment rises; a rise in the interest rate reduces it.
5. MEC depends on expectations. Because it rests on the businessman's expected future profits, it is volatile and can collapse suddenly when confidence breaks — Keynes' central explanation of why investment is unstable.
6. This volatility is why investment drives the business cycle, and why Keynes doubted that a lower interest rate alone could revive a depressed economy.
7. Autonomous vs induced investment. Autonomous investment does not depend on the level of income (for example public investment); induced investment rises when income and demand rise.

Full treatment → Unit 2 · Saving and Investment Function

12 · Aggregate Demand and Aggregate Supply (AD–AS) Unit 2 · Lec 8

1. AD = C + I + G + (X − M), the same four components as national expenditure.
2. The AD curve slopes downward — a lower price level goes with a larger quantity of output demanded — but not for the reasons a single product's demand curve does. Three separate effects cause it:
3. (a) The wealth or real balance effect. When the price level falls, the real value of the money people hold rises, they feel richer, and so they consume more.
4. (b) The interest rate effect. A lower price level means people need less money for transactions, the demand for money falls, the rate of interest falls, and investment rises.
5. (c) The net export effect. A lower domestic price level makes home goods cheaper than foreign goods, so exports rise and imports fall, and net exports increase.
6. The curve shifts when any component of demand changes for a reason other than the price level — a rise in government spending, a cut in taxes, a rise in money supply or improved business confidence shifts AD to the right.

1. Classical AS is vertical at the full-employment level of output. Classical economists assumed wages and prices are fully flexible, so the economy is always at full employment and only the price level can change.
2. Keynesian AS is horizontal and then vertical. During a depression with heavy unemployment, output can be increased without any rise in prices, so the curve is flat; once full capacity is reached it becomes vertical and further demand only raises prices.
3. The short-run AS (SAS) slopes upward because money wages are sticky in the short run: when prices rise, real wages fall, production becomes more profitable and firms produce more.
4. The long-run AS (LAS) is vertical at potential GDP, because in the long run wages adjust fully to prices and output returns to its potential level whatever the price level is.
5. Policy conclusion. Where the economy sits on the AS curve decides what a demand-side policy does. On the flat range, extra demand raises output with little inflation; on the vertical range, extra demand only raises prices.
6. Effect on the multiplier. With an upward-sloping SAS, part of any increase in demand goes into prices instead of output, so the multiplier effect on real GDP is smaller than in the fixed-price Keynesian model. The steeper the SAS, the bigger the price rise and the smaller the multiplier.

• Demand shock vs supply shock. A rightward shift of AD raises both output and prices — this is demand-pull inflation. A leftward shift of AS raises prices and reduces output — this is cost-push inflation, and the combination of higher prices with lower output is called stagflation.
• That single point links AD–AS to Unit 1's issue of stagflation and to inflation questions, so it is worth including whenever AD–AS is asked.

Full treatment → Unit 2 · Aggregate Demand and Aggregate Supply

13 · IS–LM Model — Goods Market and Money Market Together Unit 2 · Lec 9–10

1. IS stands for Investment = Saving. It is the goods-market curve, and every point on it satisfies the condition that planned investment equals planned saving (with government, I + G = S + T).
2. It slopes downward. A fall in the rate of interest makes investment cheaper, so investment rises; higher investment raises aggregate demand, and through the multiplier raises national income. So a lower r goes with a higher Y.
3. Its slope depends on two things: how sensitive investment is to the interest rate, and the size of the multiplier. Interest-sensitive investment and a large multiplier both make the IS curve flatter.
4. It shifts right when autonomous spending rises — higher government expenditure, higher autonomous investment, better business expectations, or a cut in taxes. It shifts left when these fall.

1. LM stands for Liquidity preference = Money supply. It is the money-market curve, and every point on it satisfies the condition that the demand for money equals the supply of money.
2. Money demand has two parts: the transactions and precautionary demand, which depends on income, and the speculative demand, which depends on the rate of interest. So M^d = L(Y, r).
3. It slopes upward. When income rises, people need more money for transactions; with the money supply fixed, the extra demand can only be met if some people give up speculative balances, and they will do that only if the rate of interest rises. So a higher Y goes with a higher r.
4. It shifts right when the real money supply rises — either because the central bank increases the nominal money supply or because the price level falls. A rightward shift lowers the interest rate at every level of income.

1. Fiscal expansion: the IS curve shifts right, so income rises and the rate of interest also rises. The higher interest rate reduces private investment, so part of the expansion is lost — this is partial crowding out.
2. Monetary expansion: the LM curve shifts right, so the rate of interest falls and income rises. There is no crowding out here; the lower interest rate encourages investment.
3. The three ranges of the LM curve decide which policy works:
4. (a) Keynesian / liquidity-trap range — LM is horizontal at a very low interest rate. Monetary policy is completely ineffective (extra money is simply held, the interest rate does not fall further), while fiscal policy is fully effective with no crowding out at all.
5. (b) Intermediate range — LM slopes upward. Both policies work, and fiscal policy causes partial crowding out.
6. (c) Classical range — LM is vertical. Fiscal policy is completely crowded out (income does not rise, only the interest rate does), while monetary policy is fully effective.
7. The model's main achievement is that it shows income and the interest rate are determined together by real factors and monetary factors acting jointly — Keynes' theory and the classical theory of interest reconciled in one diagram.

Full treatment → Unit 2 · IS–LM Model

14 · Business Cycle — Meaning, Nature and Costs Unit 3 · Lec 13

1. Growth is not smooth. Free-enterprise countries have grown fast over the last two centuries, but the growth has not followed a steady upward path. There is a long-run upward trend in GNP, and around it there are large short-run fluctuations.
2. The two halves have names. The period of high income, output and employment is called expansion, upswing or prosperity. The period of low income, output and employment is called contraction, recession, downswing or depression.
3. Keynes' definition (quote it): a trade cycle is composed of periods of good trade characterised by rising prices and low unemployment percentages, alternating with periods of bad trade characterised by falling prices and high unemployment percentages.
4. They recur, but they are not perfectly regular. Calling them "cycles" suggests they are periodic, but perfect regularity has never been observed. The duration has varied from a minimum of about two years to a maximum of ten to twelve years, and the size of the swings has also varied.
5. They are general, not sectoral. A business cycle affects almost all industries and all sectors at once, which is what makes it a macroeconomic problem.
6. Capital goods and durable consumer goods swing hardest. Purchases of machines, houses and cars can be postponed, so these industries feel the cycle far more than food or other necessities.

1. In recession or depression many workers lose their jobs, which causes large-scale unemployment and a loss of the output that could have been produced with full employment of resources.
2. Many businessmen go bankrupt and suffer heavy losses.
3. Depression causes human suffering and lowers levels of living.
4. Fluctuations create uncertainty, causing anxiety about future income and employment and making long-run investment very risky.
5. Even a boom is costly when it brings inflation: inflation erodes real incomes, makes life miserable for the poor, distorts the allocation of resources, redistributes income in favour of the richer sections and impedes economic growth.

• Crowther's summary (a good closing quotation): on one hand there is the misery and shame of unemployment with the poverty and social disturbance it creates; on the other hand there is the loss of wealth represented by so much wasted and idle labour and capital.
• Two patterns. Cycles without trend fluctuate around a horizontal line — change without growth. Cycles with trend fluctuate around a rising growth path; Hicks explained this by adding autonomous investment from population growth and technological progress.

Full treatment → Unit 3 · Introduction to Business Cycles

15 · Phases of the Business Cycle and Their Characteristics Unit 3 · Lec 13

1. Recovery / Upturn. This is the point just after the lowest level of the cycle, when the rate of output just begins to pick up. Revival starts when banks begin expanding credit again, or when investment spurts because capital that was allowed to depreciate now has to be replaced and new technology needs new machines. Recovery is the turning point from depression into expansion.
2. Expansion / Prosperity — characteristics: output and employment keep rising until there is full employment of resources; there is no involuntary unemployment, only frictional and structural unemployment; the gap between potential GNP and actual GNP becomes zero; a good amount of net investment takes place; demand for durable consumer goods is high; prices generally rise; profits and business confidence are high; and people enjoy a high standard of living.
3. Peak — characteristics: this is the upper turning point. Output growth starts to slow down, full capacity is nearly reached, and the strain shows up as rising prices. Something then ends the prosperity. Economists differ on what: monetarists say banks start contracting credit; Keynes said there is a sudden collapse of the expected rate of profit — the marginal efficiency of capital — caused by an adverse change in businessmen's expectations, which lowers investment and starts the downswing.
4. Contraction / Recession / Depression — characteristics: GNP falls and employment is reduced, so involuntary unemployment appears on a large scale; investment decreases, which causes a further fall in consumption; prices generally fall because aggregate demand is falling; the rate of interest falls and people's desire to hold money increases; there is a lot of excess capacity, with both capital-goods and consumer-goods industries working well below capacity; capital goods and durable consumer goods industries are hit hardest. If output falls for six months or more it is officially called a recession; when the contraction is severe it is a depression — the depression of 1929–33 is remembered for its great intensity.
5. Trough — characteristics: the lowest level of economic activity, which can last for some time. Capital stock is allowed to depreciate without replacement, and technological progress makes existing capital obsolete. Unemployment is at its highest and business confidence at its lowest, so government intervention is needed to lift the economy out.
6. The cycle then completes itself. As investment rises again it induces an increase in consumption, industries produce more, excess capacity is put back to use, employment increases and unemployment falls — and the economy is back in expansion.

• Time on the X-axis, level of economic activity (GNP) on the Y-axis.
• Draw a wavy curve and mark the four points clearly: trough → expansion → peak → contraction → trough.
• Draw the trend line through the middle. If it is horizontal you have "cycles without trend"; if it slopes upward you have "cycles with trend (growth)" — mentioning both versions earns an extra mark.

Full treatment → Unit 3 · Phases of Business Cycles

16 · Causes of Business Fluctuations Unit 3 · Lec 14

1. Volatile private investment (Keynes). Investment depends on the marginal efficiency of capital — the expected rate of profit — which rests on businessmen's expectations about the future. Expectations can change suddenly and sharply, so investment is the most unstable part of aggregate demand and is the prime mover of the cycle.
2. The multiplier. An initial change in investment does not change income by the same amount; it changes income by a multiple of itself, because the extra spending becomes somebody's income and is partly spent again. So a small fall in investment causes a large fall in income.
3. The accelerator. The relation also runs the other way: a change in income and consumption demand induces a change in investment, because firms need more capital to produce more output. Since capital goods last many years, a modest rise in demand can cause a very large rise in investment.
4. Multiplier–accelerator interaction. Put the two together and you have a self-reinforcing process: investment raises income through the multiplier, higher income induces more investment through the accelerator, that raises income again, and the upswing feeds on itself. The same mechanism works downwards in the contraction, which is why cycles are recurrent rather than one-off shocks.
5. The monetarist explanation (Friedman). Monetarists argue that fluctuations are caused mainly by changes in the money supply. An excessive expansion of money and credit causes a boom, and a sharp contraction causes a slump.
6. Friedman on the Great Depression. He argued the Depression of the 1930s was made severe by a tight money policy that let the money supply fall sharply — that is, it was a failure of government policy, not a failure of the free market. This is a strong point to include because it shows the debate, not just one side.
7. Other contributing causes worth one line each: changes in business expectations and confidence, contraction of bank credit at the peak, innovations that come in clusters (Schumpeter), and external shocks such as war, oil prices or a bad monsoon.

Full treatment → Unit 3 · Causes of Fluctuations

17 · Economic Stabilisation — Fiscal Policy Unit 3 · Lec 15–16

1. Expansionary fiscal policy is used in a recession. The government increases its expenditure and/or reduces taxes, deliberately running a deficit budget. Higher spending and higher disposable income raise aggregate demand, output and employment.
2. Contractionary fiscal policy is used against inflation. The government reduces its expenditure and/or raises taxes, aiming at a surplus budget. This cuts aggregate demand and brings the pressure on prices down.
3. Government spending works twice. It works directly, because the incomes of the suppliers and workers who receive it go up at once, and indirectly through the multiplier, as those incomes are spent again.
4. The size of the required change depends on the GNP gap and the multiplier. To close a given gap between potential and actual GNP, the required increase in government spending is the gap divided by the multiplier — and the multiplier itself depends on the MPC.
5. Tax changes work a little less strongly than spending changes, because part of a tax cut is saved rather than spent, whereas the whole of a government purchase enters demand immediately.
6. Discretionary vs non-discretionary. Discretionary fiscal policy means deliberate changes in taxes and spending decided by the government. Non-discretionary or automatic policy works by itself, without any new decision.
7. Automatic or built-in stabilisers — name all four: (a) the progressive personal income tax, which takes away more when incomes rise and less when they fall; (b) corporate income tax, which follows profits up and down; (c) transfer payments such as unemployment compensation and welfare benefits, which rise automatically in a slump; and (d) the stable dividend policy of companies, which keeps household income steady when profits fluctuate.
8. Automatic stabilisers reduce fluctuations but do not remove them. They are estimated to have reduced income fluctuations in the United States by only about one-third, so discretionary action is still needed.

1. Crowding out. A deficit has to be financed by borrowing, which raises the rate of interest and squeezes out private investment, so the net expansionary effect is smaller than intended.
2. Time lags. There is a lag in recognising the problem, a lag in deciding the policy (budgets are annual and need legislative approval), and a lag before the policy takes effect. By the time the medicine works, the disease may have changed.
3. Political constraints. It is politically easy to raise spending and cut taxes, and politically very hard to do the reverse, so fiscal policy has an inflationary bias.
4. Risk of inflation if the deficit is monetised. If the deficit is financed by newly created money rather than by borrowing, it adds directly to money supply and can cause inflation.
5. Rising public debt. Persistent deficits build up debt, and the interest payments on it eat into future budgets.

Full treatment → Unit 3 · Economic Stabilisation: Fiscal Policy

18 · Economic Stabilisation — Monetary Policy Unit 3 · Lec 15–16

1. Expansionary or easy money policy, used to cure recession. The central bank buys government securities in the open market, lowers the bank rate and repo rate, and reduces the cash reserve ratio and statutory liquidity ratio. Credit becomes cheap and plentiful, investment and consumption rise, and aggregate demand recovers.
2. Tight or dear money policy, used to control inflation. The central bank sells government securities, raises the bank rate and repo rate, and raises the cash reserve ratio and statutory liquidity ratio. Credit becomes costly and scarce, borrowing and spending fall, and the pressure on prices eases.

1. Bank rate / repo rate. The bank rate is the minimum rate at which the central bank lends to commercial banks; the repo rate is the rate at which the RBI lends to banks for short periods. Raising it makes funds costlier for banks, they raise their own lending rates, borrowing falls and credit contracts. Lowering it does the reverse.
2. Open market operations. The central bank buys or sells government securities in the open market. Selling securities takes cash out of the banking system, reduces banks' reserves and contracts credit; buying them puts cash in and expands credit. This is the most flexible instrument, because it works on banks' capacity to lend rather than on their willingness.
3. Cash Reserve Ratio (CRR). Banks must keep a fixed percentage of their deposits as cash reserves with the central bank. Raising the CRR leaves banks with less to lend and contracts credit; lowering it expands credit. Raising the CRR works only if banks do not already hold excess reserves.
4. Statutory Liquidity Ratio (SLR). In addition to the CRR, banks must keep a minimum proportion of their deposits in specified liquid assets, mainly government securities. Raising the SLR mops up extra liquidity and restricts lending.

1. Selective credit controls regulate the direction of credit, not its total. They restrict credit going into undesirable uses and encourage it into priority sectors such as agriculture, small and marginal farmers, artisans and small-scale industry.
2. The main techniques are: changing the margin requirement against stocks of specific goods; fixing a ceiling on advances to individual borrowers against sensitive commodities; charging discriminatory interest rates for particular purposes; and prohibiting the discounting of bills involving sensitive commodities.
3. Moral suasion. The central bank uses policy statements, public announcements, appeals and advice to persuade banks to follow its wishes, since banks regard it as their leader and guide.
4. Selective controls work only alongside quantitative controls, because a clever borrower can otherwise raise funds against some other security and still finance the activity being restricted.

1. Keynes doubted monetary policy in a depression for two reasons. First, in a slump the demand for money is highly interest-elastic — the liquidity trap — so extra money supply barely lowers the rate of interest. Second, investment demand is not very interest-elastic, because it depends mainly on the marginal efficiency of capital and business confidence. So a small fall in the interest rate produces little extra investment. His conclusion: fiscal policy is the reliable weapon against depression.
2. "You can bring the horse to water but you cannot make it drink" — the standard sentence for this limitation. Cheap credit cannot force pessimistic businessmen to borrow and invest.
3. Monetary policy is stronger against inflation than against recession. It can always squeeze credit, but it cannot compel anyone to use credit.
4. Weak transmission. If banks are already sitting on excess liquidity, they need not raise lending rates when the central bank raises the policy rate, so the policy does not reach the borrower.
5. Monetarists disagree with Keynes. Friedman argued that money demand is fairly interest-inelastic and investment is fairly interest-elastic, so monetary policy is powerful. He favoured a steady, rule-based growth rate of money supply rather than discretionary action, because policy lags make discretion destabilising.

Full treatment → Unit 3 · Economic Stabilisation: Monetary Policy

19 · Fiscal vs Monetary Policy — The Comparison Answer Unit 3 · Lec 15–16

1. Expansionary monetary policy is used during a slowdown or recession to revive the economy: lower interest rates make saving less attractive and borrowing cheaper, so people and firms spend and invest more, money supply in the market expands, and the economy recovers — as after the 2008 global financial crisis, when the RBI cut the repo rate sharply.
2. Contractionary monetary policy is used when inflation is mounting: higher interest rates make borrowing costly, spending is curbed, money supply falls, and the intended slowdown is achieved.
3. Expansionary fiscal policy during a recession means lower taxes and higher government spending, which raises disposable income and aggregate demand.
4. Contractionary fiscal policy during high inflation means higher taxes and lower government spending, which takes purchasing power out of the system.
5. The two must be coordinated. A tight monetary policy cannot control inflation on its own if the government is simultaneously running a large fiscal deficit that keeps adding to aggregate demand. This is exactly the criticism the RBI has made of Indian fiscal policy — and saying it shows you understand how the two policies interact.

Full treatment → Unit 3 · Fiscal Policy and Monetary Policy · applied in Solved Papers

20 · Inflation — Meaning, Definitions and Types Unit 3 · Lec 17

1. By speed: creeping (very mild, about 1–3% a year) → walking/trotting (moderate, single-digit) → running (about 10–20%) → galloping or hyperinflation (50% or more a month; Germany 1922–23). Also single-digit vs double-digit.
2. By cause: demand-pull (excess aggregate demand), cost-push (rising costs), and stagflation (inflation with stagnation and unemployment).
3. By period: peace-time inflation, and war and post-war inflation.
4. Measured as the percentage change in a price index — WPI or CPI: (P_t − P_t−1) / P_t−1 × 100.

Full treatment → Unit 3 · Inflation: Meaning and Types

21 · Causes of Inflation — Demand-Pull vs Cost-Push Unit 3 · Lec 17

1. Increase in money supply; deficit financing of government spending.
2. Credit creation by banks; rise in public and private expenditure.
3. Increase in exports (less supply at home); repayment of public debt and tax cuts (more disposable income).
4. Black money and population growth.
5. Keynes: the inflationary gap; monetarists (Friedman): excess growth of money supply.

1. Wage-push by trade unions beyond productivity.
2. Material costs — oil-price shocks (1973, 1979), farm-price shocks after a poor monsoon (food inflation).
3. Import-price shocks from rupee depreciation; higher profit margins.
4. Scarcity (natural or artificial), natural calamities, lockdowns, under-utilised capacity.
5. Result: prices rise and output falls — stagflation.

Draw both diagrams — AD₀ → AD₁ on an upward SAS (demand-pull), and SAS₀ → SAS₁ against a fixed AD with output falling (cost-push).

Full treatment → Unit 3 · Causes of Inflation

22 · Effects of Inflation Unit 3 · Lec 17

1. Erodes purchasing power and real income.
2. Redistributes: creditors lose, debtors gain; fixed-income groups and pensioners lose; businessmen and traders gain.
3. Erodes wealth held as cash, deposits and bonds; the real interest rate falls.
4. Hits the poor hardest — "enemy number one of the poor".
5. Discourages saving and diverts it into gold, jewellery and real estate; slows growth.
6. Misallocates resources and creates uncertainty about incomes and returns.
7. Worsens the balance of payments — exports fall, imports rise.
8. Social and political unrest; hyperinflation can collapse the payment system.

Full treatment → Unit 3 · Effects of Inflation

23 · Controlling Inflation, and Inflation in Less Developed Countries Unit 3 · Lec 17–18

1. Monetary: raise bank rate / repo rate; raise CRR and SLR (variable reserve ratios); sell securities (open market operations); selective credit controls on sensitive commodities.
2. Fiscal: cut unproductive government expenditure; raise taxes and check evasion; reduce the fiscal deficit and deficit financing.
3. Direct: price control of essentials; rationing through the PDS; freeze of wages, profits, dividends and bonus.
4. Supply-side: import goods in short supply, ban exports of scarce goods, release buffer stocks, raise farm productivity.
5. Incomes policy and indexation — link wages to productivity; index wages to protect the poor.

1. Deficit-financed development and unproductive public spending.
2. Structural bottlenecks (structuralists — Myrdal, Streeten): agriculture, resource gap, foreign exchange, infrastructure.
3. Long gestation of capital-intensive projects; food shortages; exports of essentials.
4. High MPC of the poor, population growth, inelastic supply.
5. Weak tools — underdeveloped money markets, narrow tax base, corruption.
6. Remedy: demand control plus supply expansion — priority to agriculture and infrastructure.

Full treatment → Unit 3 · Control · Inflation in LDCs

24 · The Phillips Curve and NAIRU Unit 3 · Lec 18

1. Diagram: unemployment on X, inflation on Y; downward-sloping convex curve (e.g. 10% inflation with 3% unemployment; 5% with 8%).
2. Reason: near full employment wages rise, firms raise prices, workers demand more — a wage–price spiral; Keynesian: rising AD with upward-sloping AS raises both output and prices.
3. Policy dilemma: lower unemployment means higher inflation and vice versa — choose an optimum mix.
4. Stagflation (1970s): high inflation with high unemployment after oil shocks — the curve shifted, it was not stable.
5. Friedman's natural rate hypothesis: the trade-off is only short-run; once expectations adjust, unemployment returns to its natural rate at higher inflation and the short-run curve shifts up.
6. Long-run Phillips curve is vertical at NAIRU (non-accelerating inflation rate of unemployment) — no permanent trade-off.
7. Rational expectations: no trade-off even in the short run.

Draw both curves — the short-run trade-off, and SPC₁, SPC₂, SPC₃ stacked against a vertical LPC at U*.

Full treatment → Unit 3 · Phillips Curve · solved as Final Q5

25 · The Central Bank — Principles, Functions and Objectives Unit 4 · Lec 19

1. Acts in the public interest, not for profit (DeKock).
2. Does not compete with commercial banks; is their leader.
3. Is the monetary authority — promotes stability and development in line with government policy.

1. Note issue — monopoly (except ₹1 notes); minimum reserve system since 1956–57.
2. Banker, fiscal agent and adviser to the government — keeps accounts, manages public debt.
3. Bankers' bank — custodian of cash reserves (CRR).
4. Lender of the last resort — emergency cash when a bank faces a run and others refuse.
5. Clearing house; controller of credit; custodian of forex reserves and manager of the exchange rate; promoter of development and supervisor of banks.

1. Stable internal prices; stable exchange rate; protect gold / forex reserves; control business cycles; meet business needs; growth with stability.
2. Today: flexible inflation targeting — 4% CPI (band 2–6%), Monetary Policy Committee (since 2016).

Full treatment → Unit 4 · Principles · Functions · Objectives

26 · Credit Control — Quantitative and Qualitative Unit 4 · Lec 20

1. Bank rate / repo rate — raise to contract credit, lower to expand. Limits: needs organised money market; weak response in depression ("horse to water").
2. Open market operations — sell securities to contract, buy to expand; acts directly on banks' capacity to lend.
3. CRR — ₹4,000 reserves support ₹20,000 deposits at 20% but only ₹16,000 at 25%.
4. SLR — share of deposits held in government securities.

1. Margin requirements on loans against sensitive commodities (60% → 70% margin cuts the loan from 40% to 30%).
2. Ceilings on advances; discriminatory interest rates; ban on discounting bills for sensitive goods.
3. Moral suasion; priority-sector direction (positive side).
4. Work only alongside quantitative controls; weakened by black money and non-bank finance.

Full treatment → Unit 4 · Credit Control

27 · Central Bank and Economic (Sustainable) Development Unit 4 · Lec 20

1. Savings — positive real interest rate; bank branch expansion (8,262 in 1969 → 62,350 in 1995).
2. Price stability — keeps savings in financial form.
3. Investment — cheap and adequate credit (repo cut 9% → 4.75% after 2008).
4. Public investment through SLR; priority-sector lending; selective credit against speculation.
5. Institution building — IFCI, SFCs, agricultural and export credit institutions.
6. Sustainable development — supervision against crises, financial inclusion, digital payments, credit to green energy and infrastructure, advice to government.
7. Lender of the last resort — fractional reserves → runs → central bank lends when no one else will → prevents failures, preserves trust.

Full treatment → Unit 4 · Role in Development · solved as Re-Exam Q6

28 · Money, Money Supply and Credit Creation Unit 4 · Lec 21–22

1. Functions — "a medium, a measure, a standard, a store": medium of exchange, measure of value, standard of deferred payments, store of value; plus transfer of value and contingent functions (basis of credit, distribution of national income).
2. Money supply excludes money held by the RBI, banks and government (money-creating agencies); it is a stock.
3. RBI measures: M1 = C + DD + OD; M2 = M1 + post-office savings deposits; M3 = M1 + time deposits; M4 = M3 + total post-office deposits. M1, M2 narrow; M3, M4 broad.
4. Determinants: M = H × (1 + k)/(r + k) — rises with high-powered money H, falls with currency ratio k and reserve ratio r.
5. Credit creation: deposit multiplier = 1/r. ₹1,00,000 at 20% CRR → ₹5,00,000 total deposits, ₹4,00,000 created.
6. Limits: amount of cash, cash-holding habit (leakage), CRR, willingness to deposit, assets to lend against.

Full treatment → Unit 4 · Money · Supply of Money · numericals in Numerical Lab

29 · Demand for Money, Liquidity Preference and the Liquidity Trap Unit 4 · Lec 22–24

1. Classical (Fisher): MV = PT → M_d = PT/V. Cambridge (Marshall, Pigou): M_d = kPY.
2. Transactions motive — bridge the gap between receipt of income and spending; depends on income.
3. Precautionary motive — unforeseen contingencies; depends on income.
4. Speculative motive — gain from expected changes in interest rates / bond prices (which move inversely); falls as the interest rate rises.
5. M_d = L₁(Y) + L₂(r); modern form M_d = L(Y, r). Factors: price level, income, interest rate, credit availability.
6. Liquidity trap: at a very low interest rate the LP curve becomes perfectly elastic; extra money is held idle, the interest rate cannot fall, investment does not rise — monetary policy is ineffective; fiscal policy is needed (horizontal LM). Examples: 1930s Depression, Japan 1990s, post-2008.

Full treatment → Unit 4 · Demand for Money · Liquidity Trap

30 · Market Shortcomings and the Government's Role in Economic Systems Unit 5 · Lec 25–26

1. Inoptimal distribution of goods; inoptimal allocation of resources.
2. Perfect competition does not exist; individuals are not always the best judges.
3. Profit is the sole motive; public utilities get low priority.
4. Growth of monopolies; externalities — spill-over costs (pollution) and benefits (education, parks).

1. Capitalist — limited, corrective and complementary (Adam Smith's four functions; Meade's eight).
2. Socialist — comprehensive: state ownership, Central Planning Authority.
3. Mixed — private + public sectors; wider than capitalist, narrower than socialist; regulatory + promotional roles.

Full treatment → Unit 5 · Market Shortcomings · Economic Systems

31 · Government and Private Business Unit 5 · Lec 27

1. Regulatory measures: industrial and licensing, taxation, monetary and credit, income and wage, price, technology and employment, labour, monopoly, import–export, foreign exchange, safety and environment policies.
2. Adverse effects: minimum wages cut employment; dear money cuts investment; progressive taxes cut after-tax profit.
3. Positive effects: wages sustain demand; monetary policy stabilises; government spending buys from business; anti-monopoly law keeps markets competitive.
4. Promotional role: transport, communication, irrigation, power, strategic industries, technology; education, health, housing, training.
5. Helps business by accelerating growth (bigger markets) and creating external economies (lower costs).

Full treatment → Unit 5 · Government and Private Business

32 · Industrial Policy of India Unit 5 · Lec 28

1. IPR 1948 — mixed economy; four categories: (i) central monopoly — arms, atomic energy, railways; (ii) basic and key — new units by state (coal, iron and steel, aircraft, ships, telegraph, telephone); (iii) ~20 regulated industries; (iv) residual — private. Small and cottage industries promoted; foreign investment restricted.
2. IPR 1956 — socialist pattern; Schedule A (17, state only), Schedule B (12, progressively state), residual (private); licensing for setting up and expansion; regional balance.
3. Dutt Committee — licensing favoured large houses (Birlas); over-licensing 50–100%.
4. 1970 restrict large houses; 1973 joint sector; 1977 small and cottage industries (504 items reserved); 1980 first step to liberalisation.
5. NIP 24 July 1991 (after the forex crisis, IMF–World Bank): 9 of 17 de-reserved; disinvestment (49% in 31 PSUs); licensing abolished except security, safety, environment, hazards; MRTP controls removed; FDI automatic up to 51% in 34 industries.
6. Privatisation = transfer of ownership, management and control of PSUs to private entrepreneurs — for financial discipline and efficiency.

Full treatment → Unit 5 · Industrial Policy · Joint Sector · solved as Re-Exam Q7

33 · Corporate Social Responsibility Unit 5 · Lec 29

1. Shareholders: reasonable return, growth, goodwill.
2. Employees: fair wages, safe conditions, welfare, training, recognition and respect, grievance redressal.
3. Consumers: reasonable price, promised quality, safe products, redressal, no black-marketing, R&D.
4. Government: pay taxes, obey laws, no loophole exploitation, no bribery, co-operate in social values.
5. Society: prevent pollution, ethical values, health/education/culture, ecological balance, appropriate technology.
6. For: give and take, better society, less state intervention, power with responsibility. Against: Friedman (only to raise profits), costly, hurts competitiveness, no accountability.
7. India: Tata Steel, L&T; Companies Act 2013, Section 135 — net worth ≥ ₹500 cr / turnover ≥ ₹1,000 cr / net profit ≥ ₹5 cr → spend ≥ 2% of average net profit of last three years.

Full treatment → Unit 5 · CSR · solved as Final Q7

34 · Government Budget Constraint and Fiscal Policy Unit 5 · Lec 30

1. Taxes have limits — disincentives, evasion, Laffer curve — so deficits arise.
2. Bond financing (ΔB) — raises debt and interest burden; raises interest rates; crowds out private investment.
3. Money financing (ΔM) — "deficit financing" in India before 1997; expansionary in depression, inflationary near full employment.
4. Inflation tax = inflation rate × real monetary base; rises then falls with inflation.
5. Deficits: revenue (revenue exp − revenue receipts); fiscal (total borrowing); primary (fiscal − interest).
6. FRBM Act 2003 — fiscal deficit to 3% of GDP, eliminate revenue deficit, no direct RBI borrowing.
7. Keynesian functional finance accepts deficits in recession; fiscal policy must balance taxes, borrowing and money creation.

Full treatment → Unit 5 · Budget Constraint · Unit 3 · Fiscal Policy