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Showing posts with the label interest rate

Decision Making as Output and Bounded Rationality

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  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
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A Note on Monetary Polcy

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  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
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Macroeconomics and Firm Decision Making

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  As observed in many past posts, economics has close linkages with real life. As practising managers or entrepreneurs economics helps in undertaking structured analysis and decision making. There are pointers towards increasing returns of decision making using structured tools like economics. Therefore, economics to a business practitioner would be indispensable. It is not that economics offers something new or novel. Many economic theories have been practiced consciously or sub-consciously over centuries by businessmen and others. What economists have done from Adam Smith onwards is to theorize the empirical observations. The empirical observations when aggregated would point to certain patterns which emerge as theory. For long, there were no distinction between macro or micro economics, something came into existence through the thoughts of John Maynard Keynes and his successors. Macroeconomics evolved in a different fashion in contrast to microeconomics. The former sounded glamorous
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Caselets in Macroeconomics

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Caselet I- Rupee depreciation and textile industry The recent rupee depreciation has enabled the Indian textile industry to hold yarn prices and also increase yarn exports.   Though Indian industry demonstrates stronger backward linkages, low labour costs have enabled countries like Bangladesh, Pakistan and Vietnam to overtake India in terms of capturing textile export markets.   With Chinese Yuan appreciating, Indian exports have become more competitive. Indian textile export share is marginal ( 5% as compared to China’s 30%). Many analysts advocate leveraging the current scenario to capture the global market at the expense of China.   As a CEO of leading textile manufacturer, you are planning to go in for capacity expansion. Capacity expansion necessitates funding and thus you approach a consortium of banks. Prepare the detailed projections convincing the bankers how the global economic trends portray well for Indian textile exporters. (Note: Use financial statements sh
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