Posts

Showing posts with the label Reserve Bank of India

Decision Making as Output and Bounded Rationality

-
  The classical economics theories proceed on the assumption of rational agents. Rationality implies the economic agents undertake actions or exercise choices based on the cost-benefit analysis they undertake. The assumption further posits that there exists no information asymmetry and thus the agent is aware of all the costs and benefits associated with the choice he or she has exercised. The behavioral school contested the decision stating the decisions in practice are often irrational. Implied there is a continuous departure from rationality. Rationality in the views of the behavioral school is more an exception to the norm rather a rule. The past posts have discussed the limitations of this view by the behavioral school. Economics has often posited rationality in the context in which the choices are exercised rather than theoretical abstract view of rational action. Rational action in theory seems to be grounded in zero restraint situation yet in practice, there are numerous restra
Post a Comment
Read more

Demand and Supply of Money: A Primer

-
  The execution of monetary policy as an instrument to direct the economy to the needed trajectory is essentially dependent on people’s willingness to use those instruments. As observed in the previous posts, the monetary policy is an indirect attempt to induce an increase or decrease in consumption or investment to the required rate using the cost of money, the interest rates as the guiding principle. By increasing or decreasing the interest rates, the objective would be to keep money supply stable while encouraging or discouraging economic agents to indulge in consumption or investment. Therefore, the context provides the backdrop for understanding money supply and the demand for money thus the foundation of monetary framework. The current note will delve deeper into these aspects.   The understanding would begin with the functions of money. Money has three key functions viz, the unit of account, the store of value and medium of exchange. The inability to perform the first two ro
Post a Comment
Read more

A Note on Monetary Polcy

-
  The aggregate demand is defined by the identity Y=C+I+G+(X-M). Implied is the aggregate demand is the sum of consumption, investment, government expenditure and net exports. If the government intends to create a trajectory for the AD, it can alter one or more than one of these variables to meet its intended policy objectives. The government itself is autonomous player and thus can influence the economy through increased or decreased government spending G. Indirectly, the government can influence the spending through two different instruments, the fiscal and the monetary policy. The fiscal policy apart from the changes in government expenditure would also comprise of changes in tax rates. The government can increase or decrease tax rates thus influencing consumption, investment and net exports. The second instrument, the government employs is the monetary policy. It is through the instrument of interest rates, the government seeks to control the money supply and thus influence aggrega
Post a Comment
Read more