IMPACT OF MACRO

ECONOMIC FACTORS

ON MONEY SUPPLY

INTRODUCTION

Macroeconomics (from the Greek prefix makro- meaning"large" and economics) is a branch of economics dealing withthe performance, structure, behavior, and decision-making ofan economy as a whole, rather than individual markets. JohnMaynard Keynes, an English economist, intriducedmacroeconomics hence it is also referred to as Keynesianism.

Macroecnomic factor that is pertinent to a broad economy atthe regional or national level and affects a large populationrather than a few select individuals. Macroeconomic factorssuch as economic output, unemployment, inflation, savings andinvestment are key indicators of economic performance and areclosely monitored by governments, businesses and consumers.

COMPONENTS OF THE MONEY SUPPLYMajor monetory aggregates are the quatitative measures of the

supply of money. They are known today as M1 , M2, M3 and

M4 .

M1 ( Narrow money )

Comprises all the currency in the economy as well as the

money in savings and current accounts held with banks.

M2

M 1 + Fixed deposist held with banks.

M3

M 2 + Fixed deposits with banks

M4

M 3 + All deposits with post office

GDP AND MONEY SUPPLY

GDP is the monetary value of all the finished goods and

services within a country’s bordes in a specific time period.

Link of GDP with money supply

MV = PQ

M is the total dollars in the nation’s money supply

V is the number of times per year each dollar is spent (velocity)

P is the average price of all the goods and services sold during

the year

Q is the quantity of assets, goods and services sold during the

year

EFFECT OF GDP ON MONEY SUPPLYMoney supply and GDP do not automatically affect each other,

but Money Supply can affect GDP depending on monetary

policy. The GDP can only increase the demand of money and

transactions will stall if that demand is not met. GDP

affect money supply through the banking system. When growth

is high , banks make additional loan and expand the money.

MACROECONOMIC POLICY

Macroeconomic policy is usually implemented through two

sets of tools: fiscal and monetary policy.

MONETARY POLICY

Central banks take action by issuing money to buy bonds (or other assets), which boosts the supply of money and lowers interest rates, or, in the case of contractionary monetary policy, banks sell bonds and takes money out of circulation. Usually policy is not implemented by directly targeting the supply of money.

FISCAL POLICY

Fiscal policy is the use of government's revenue and expenditure as instruments to influence the economy. . If the economy is producing less than potential output, government spending can be used to employ idle resources and boost output.

DEFINITION AND IMPACT OF

INFLATION

Recall that inflation occurs when the general level of

prices is rising . The rate of inflation is the percentage

change in a price index from one peroid to the next.

The major price indexes are the Consumer Price Index

(CPI) and the GDP deflator.

Inflation affects the economy by redistributing income &

wealth and by impairing efficiency. Unanticipated

inflation usually favours debtors , profit seekers ,and risk

taking speculators.

It hurts creditors , fixed income and timid investors.It

leads to distortions in relative prices,taxes rates and real

interest rates.

DETERMINATION OF FOREIGN

EXCHANGE RATES

The foreign exchange rate is the price of one currency in terms

of another currency . When we want to exchange one nations

money for that of another, we do so at the relevant foreign

exchange rate. There is a foreign exchange rate between US

dollars and the currency of every other country.

We measure the foreign exchange rate (e) as the amount of

foreign currency that can be bought with 1 unit of domestic

currency:

e = foreign currency = yen = euro

domestic currency $ $

DETERMINATION OF FOREIGN

EXCHANGE RATES

A fall in the market price of a currency is a depreciation;

a rise in a currency value is called an appreciation . In a

system where governments announce offical foreign

exchange rates ,a decrease in the official exchange rate is

called a devalution , while an increase is a revalution.

According to the purchase power parity theroy of

exchange rates tend to move with changes in relative

price levels of different countries . This theroy helps to

measure the purchasing power of incomes in different

countries ,it raises the per capita outputs of low income

countries.

PPP AND THE SIZE OF THE NATION

The customer approach is to use the market exchange

rate to convert each currency into dollars.

The market rates can rise & fall sharply , the "size“ of

countries might change by 10 or 20 % overnight .

Moreover, the use of market exchange rates tends to

under estimate the national outputs.

Economists generally prefer to use ppp exchange rates to

compare living stands in different countries.

When market exchange rates are used , the income &

outcome of low income countries tend to be understated

PPP AND THE SIZE OF THE NATION

Under statement occurs because a substantial part of the

output of such countries come from labour intensive

services

When we calaculate Purchase Power Parity (ppp)

exchange rates including the prices of non traded goods ,

the GDPs of low income countries rise relative to those

of high income countries

For example ,when PPP exchange rates are used , china

GDP is 2.3 times of the level calaculated using market

exchange.

THE CRISIS IN 2013 ENVELOPING

INDIA'S CURRENCY

There’s really no denying it: India’s got a full-blown currency crisis on its hands.

The rupee fell a remarkable 3% in trading today. At points it touched 68 per US dollar, a never-before-reached level. It’s fallen nearly 23% against the US dollar in the last six months.

India needs far-reaching reforms. Corruption, labor market structure, subsidies. They all need work. But before it moves on any of those issues—if it ever does—India still needs to put the fire out.Here 's how to do it.

FALLING RUPEE : CAUSES AND

PERKS

Recession in the Euro zone

Forex demand

Poor current account deficit

No balance at balance of payments

Volatility in the equity market

Withdrawal of investors

Price of crude oil

Increased demand for gold

1) Fight the markets:

The Reserve Bank of India (RBI) needs to put everything it’s

got into intervening in the markets to beat back the speculators

pushing the rupee lower.

To be clear, the RBI has already been active in the markets. But

it has shown little appetite for a real fight.

The bank has tended to intervene late in the trading day.But

the market is a bully. And it needs to be confronted face to face.

HOW TO SAVE THE VALUE OF RUPEE?

2) Get help:

Once the RBI commits to a serious showdown with the markets, it will be tested. That means the RBI is going to have to dip into its FX reserves and continue buying until the market is convinced it will hold the line.

If the market sees them shrinking too much it will feel emboldened to keep pushing the value of the rupee lower.

That’s why the RBI needs help. It needs to find a reliable source of hard currency to convince the market is has almost unlimited buying power to defend the rupee.

An effective way of doing that is by cutting a deal with another central bank to swap currencies. These are called swap lines.

3) Clamp down on cash outflows :

India’s got to thread a very difficult line here. It has to try to

keep hard currency from fleeing the country.

It doesn’t want to impose the type of hard and fast capital

controls that tend to make investors want to pull every last cent

out of a country as fast as possible. So it can take half

measures. And that’s what it’s done.

It’s moved to cut the imports of commodities such as gold and

oil as well as plasma televisions. It will likely do more.

4) Pull fresh cash in :

Simply put, India has been relying on foreign investors to finance a current account deficit that’s been getting worse and worse. And since foreign investors now want their money back, India has got to find a way to cover the shortfall.

The Indian government could even tap those folks for a low-cost loan by launching a so-called “diaspora bond.”

The country is also reportedly considering allowing state-run industries to issue so-called quasi-sovereign bonds as a way to raise cash. And of course, there are always exports. But don’t hold your breath—exports have been stagnant for a while now.

None of this is rocket science. This is the long-established playbook for central bankers in fighting off a currency crisis. But that doesn’t mean it always works.

If it doesn’t, India will have little choice but to go back to the International Monetary Fund for a loan. That’d be a painful replay of the loans India was forced to take from the IMF back in 1991. And it’d be humiliating for a country that was supposed to be a leader of a new phase of global growth.

CONCLUSION

BIBLIOGRAPHY

OLYMPIC HURDLES,THE WEEK

MAGAZINE,SEPETEMBER 1 2013

ECONOMICS,PAUL A SAMUELSON & WILLIAM

D NORDHAUS , SEPETEMBER 2008