Special branch economics knowledge

Economics is the study of how societies use scarce resources to produce valuable commodities and distribute them among different people.
Human wants are unlimited, but the resources to satiety these wants are limited. Therefore it is essential to unlimited utilize these limited resources efficiently.
According to Robbins: “Economic is the science which studies human behavior as a relationship between ends and scarce means which have alternative uses.”
Macro economics are the special branch economics knowledge which deals with –
 Overall performance of the economics.
 The level of social and national output.
 The level of employment of the economy.
 Mechanism of price level stabilization.
 Social consumption and investment
 National foreign trade both physical & remittance.
Simply, we can say that macroeconomics is the study of entire economy.
There are three prime objectives of macro – economic –
 To increase total output of the economy.
 To increase total employment of the economy.
 Stabilization of prize level.
 Improving the trade balance.

four economic policies

1. Monetary policy.
2. Fiscal policy.
3. Income policy.
4. Trade policy.
The first two policies are very much crucial for macro economics. Let us we need to discuss them –
 Monetary policy: (Related with money)
Monitory policy is the combination of interest rate money in circulation and money supply by manipulating which central bank or the Government can change the macroeconomic indicators.
The basic ingredients of monetary policy are money supply. Changes the money supply move interest rates up or down and affect speeding in sector such as business investment, housing and net exports.
      Money Supply            Interest rate                 Money in circulation            Investment             output      
      Money Supply            Interest rate                 Money in circulation            Investment             output    
So the objective of macro economics through monetary policy should be increase money supply.
Objectives of Monetary policy:
1. Price stability
2. Exchange stability
3. Full employment
4. Accelerating economic growth
5. Balance payment equilibrium
6. Safeguarding of the country’s gold reserve.

downward sloping aggregate demand curve

The aggregate demand curve slopes downward primarily because of the money – supply effect. Money supply affects the components of aggregate demand. Such as investment, consumption, Govt. Spending, exports etc.
Aggregate demand is downward sloping due to the impact of real money balance. Incase in the price level will reduce the real money balance considering the nominal money constant. This is a tight money situation. Tight money will lead to lower demand due to the increase of interest rate.
We know,Real money balance=(Nominal money balance)/(Price level)
Numerically 100/10tk=10 coke
Real money balance is always express in commodity form. The actual impact of tight money situation in aggregate demand:
Nominal money supply is constant but price level is increase
↑Price level →↓Real money balance →Interest rate ↑→Investment ↓→ output ↓.
Note: Here Interest rate increase for two reason
Scarcity of money
Price of commodity is high.
So it shows that the increase in price decrease the output level.
If price level decrease at constant nominal money supply the condition will be reversing this is known loose money situation.
↓ Price level →↑Real money balance → Interest rate ↓→Investment ↑→ output ↑

aggregate demand curve

Basically along and off the demand curve depend on price level of the economy. If price level is varying or change then we can tell the situation as movement along. On the other hand when price level is fixed or constant then the condition will be known as off or shifting the aggregate demand curve.
Factor that affect shifting the demand curve –

Factors are –
Monetary policy
Fiscal policy
External variables.
Monetary policy: The objective of monetary policy is changing output level through increasing or decreasing the money supply and manipulation of interest rate.
Effect of monetary policy:
↑ Money supply →↑ real money balance →↓ interest rate →↑ investment →↑output.
↓Money Supply →↓ real money balance →↑ interest rate →↓ investment →↓ output.
↓Interest rate →↑ investment →↑output.
↑interest rate →↓investment →↓ output.
Fiscal policy: The main components of fiscal policy are Govt. spending and taxation.
Effect of fiscal policy:
↑Govt. spending → income ↑→ savings ↑→↑investment →↑output.
↓Govt. spending → income ↓→ savings ↓→↓ investment →↓ output.
↑Tax rate → income ↓→ savings ↓→ investment ↓→ output↓
↓Tax rate → income↑→↑ savings →↑ investment → output ↑
Exogenous or External variables: The important external variables are foreign output, asset values, technology & oil price.
Effect:
Foreign output ↑→↑ consumption →↑ export →↑ income →↑ output.
If foreign output is decreases the condition will be reverse.
Asset value ↑→↑ income →↑ output
Asset value ↓→↓ income →↓ output
Technological advancement ↑→↑ investment →↑ output.
Oil price ↑→ Net export ↓→ income ↓→ output↓
And the reverse condition if oil price reduces.
N.B.=Here net export=export-import

monetary system of economy

Barter system means exchange of goods for other goods. Monetary system means exchange of goods for money. Goods are the main component of barter system but money is the main factor of monetary system. Monetary transaction is easier than barter transaction.

“Money is that money does”
 According to Robertson “anything which is widely accepted in payment for goods, or in discharge for other kind of obligations.”
We can define money as the following way:
 Money is a medium of exchange.
 Money cannot be consumed.
 Money is the most liquid asset.
 Money is the value of store
 Money is what money does
 Money is not a commodity for output.
 Money can do everything
 Money has no value of its govt.

basic functions of money

a) Medium of exchange: As a medium of exchange, money is something generally accepted as payments for goods and services.
b) Measure of value: As a measure of value, money expresses worth in terms that most individuals understand.
c) Store of value: It means goods or services can be converted into money that is easily stored until some future time.
d) Transfer of value: It means through money we can sell moveable and immoveable belongings at one place and we can acquire and buy them elsewhere.

Types of money.

Commodity money: Money that has an alternative use as a commodity. I.e. gold, silver, ring, diamond, cattle, cigarettes etc.
Paper money: Money that we use in our day to day transaction in modern life. I.e. currency note.
Bank money: Money that deposits in the bank or other financial institution.

role & importance of money in modern economy

There is no doubt that money facilities and motivates all economic activity relating to consumption, production, and exchanges & distribution.
 Money enables a consumer to maximize his satisfaction.
 Money measure the intensity of desire of consummates.
 Money facilities production by stimulating saving & investment.
 Money gives mobility to capital & helps in capital formation.
 It enables the harnessing various factors of production, so that the entrepreneurs is able to maximize profit.
 Money facilitates exchange & helps in both trade and commerce both national & international.
 Money helps price mechanism to allocate resources.
 Money accelerated the process of industrialization.
 Money is an extremely valuable social instrument which has largely contributed to the growth of national wealth & social welfare.