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BUSINESSCYCLESANDITSEFFECTSONTHEGOVERNMENTMONETARYPOLICY

PRESENTED BY

PRAJWALA

MARTINA

KESHAV RAJ

SRINIVAS REDDY

A.V.S.JATIN

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CONTENTS OFBUSINESSCYCLES1. Introduction.2. Features.

3. Phases.

4. Theories of Business Cycles.

5. Effects of Business Cycles on Govt.

Monetary Policy.

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INTRODUCTION TO BUSINESS

CYCLE

A business cycle refers to periods of expansion

and contraction.

A peak is the high point following a period ofeconomic expansion.

Although is the low point following a period of

economic decline.Business Cycle refers to the cylindrical variation in

an economic activity.

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FEATURES OF BUSINESS CYCLE

Following are the features of the Business Cycles:

A Trade cycle is a trade like movement.

Cycling fluctuations are wave-like changes ineconomic activity.

Expansion and Contraction in trade cycle arecumulative in effect.

Trade cycles are all-pervading in their impact.

A trade cycle is characterised by the presence oftheir crisis.

Though cycles differ in timing and amplitude, theyhave pattern of phrases which are sequential in nature.

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PHASES OF TRADE CYCLE

1. Phase of Prosperity.2. Phase of Recession.

3. Phase of Depression.

4. Phase of Revival or Recovery.

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THEORIES

OFBUSINESS CYCLES

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1.THEMONETARYOVER-INVESTMENT THEORY

The gist of monetary over investment theory is that

working of monetary system brings about over

investment in the economy.

Due to this it causes depressions.

This theory was explained by the Australian

Economist F.A.Hayek.

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According to Hayek cyclical fluctuations are theresult of shortening and lengthening of the process of

production.

Hayeks theory is based on the assumption that full

utilization of investment in the capital goods,reducedthe resources used in the production of consumer

goods.

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Keyness Theory

According to him trade cycles occurs due to the

fluctuations in the rate of changes in the marginal

effiency of capital.

A broad idea is visualised by Keynes: the expansion

phase of the cycle is occasioned by a high value of

marginal effiency of capital, a rapid increase in the

rate of investment would take place.

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HickssTheory ofTradeCyclesThe theory of acceleration and the theory of multiplier are the

two sides of theory of fluctuations.

An expansionary phase starts in the economy when there is

increase in the investment.

The process of interaction of multiplier and accelerator will

continue to operate till the expansion of economic

activity(measured in terms of income and employment).

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EFFECTSOFBUSINESSCYCLESONGOVT.MONETARYPOLICY

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WHAT IS MONETARY POLICY?

Monetary policy is the management of money supply and interest

rates by central banks to influence prices and employment. Monetary

policy works through expansion or contraction of investment andconsumption expenditure.

Monetary policy is the process by which the government, central

bank (RBI in India), or monetary authority of a country controls.

B k R P li h b k i h Offi i l i

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Bank Rate Policy: The bank rate is the Official interest rate atwhich RBI rediscounts the approved bills held by commercialbanks. For controlling the credit, inflation and money supply,RBI will increase the Bank Rate. Current Bank Rate is 6%.

Open Market Operations: The Open market Operations referto direct sales and purchase of securities and bills in the openmarket by RBI. The aim is to control volume of credit.

Cash Reserve Ratio: Cash reserve ratio refers to that portion oftotal deposits in commercial Bank which has to be kept with RBIas cash reserves.

Statutory Liquidity Ratio: It refers to that portion of depositswith the banks which it has to keep with itself as liquid

assets(Gold, approved govt. securities etc.). the current SLR is25%.

If RBI wishes to control credit and discourage credit it would

increase CRR & SLR.

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Qualitative measures:

Qualitative credit is used by the RBI for selective purposes.

Margin requirements: This refers to difference between thesecurities offered and and amount borrowed by the banks.

Consumer Credit Regulation: This refers to issuing rules

regarding down payments and maximum maturities of

installment credit for purchase of goods.

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Rationing of credit: The RBI controls the Credit granted /

allocated by commercial banks.

Moral Suasion: Psychological means and informal means of

selective credit control.

Direct Action: This step is taken by the RBI against banks

that dont fulfill conditions and requirements. RBI may refuse

to rediscount their papers or may give excess credits or charge

a penal rate of interest over and above the Bank rate, for credit

demanded beyond the limit.

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