Phillips Curve, Network Effect, Theory of Interest, Employmentand Money, Insolvency and Bankruptcy Code, Inflation (Low and High)
Phillips Curve, Network Effect, Theory of Interest, Employmentand Money, Insolvency and Bankruptcy Code, Inflation (Low and High)
Phillips Curve, Network Effect, Theory of Interest, Employmentand Money, Insolvency and Bankruptcy Code, Inflation (Low and High)
The General Theory of Employment, Interest and Money of 1936 is the last and most
important[citation needed] book by the English economist John Maynard Keynes. It created a profound shift
in economic thought, giving macroeconomics a central place in economic theory and contributing
much of its terminology[1] – the "Keynesian Revolution". It had equally powerful consequences in
economic policy, being interpreted as providing theoretical support for government spending in
general, and for budgetary deficits, monetary intervention and counter-cyclical policies in particular.
It is pervaded with an air of mistrust for the rationality of free-market decision making.
Keynes denied that an economy would automatically adapt to provide full employment even in
equilibrium, and believed that the volatile and ungovernable psychology of markets would lead to
periodic booms and crises. The General Theory is a sustained attack on the classical
economics orthodoxy of its time. It introduced the concepts of the consumption function, the principle
of effective demand and liquidity preference, and gave new prominence to the multiplier and
the marginal efficiency of capital
eynesian economics is an economic theory of total spending in the economy and
its effects on output and inflation. Keynesian economics was developed by the
British economist John Maynard Keynes during the 1930s in an attempt to
understand the Great Depression. Keynes advocated for increased government
expenditures and lower taxes to stimulate demand and pull the global economy
out of the depression.
The Insolvency and Bankruptcy Code, 2016 (IBC) is the bankruptcy law of India which seeks to
consolidate the existing framework by creating a single law for insolvency and bankruptcy. Key
features[edit]
Insolvency Resolution : The Code outlines separate insolvency resolution processes for
individuals, companies and partnership firms.The process may be initiated by either the debtor or the
creditors. A maximum time limit, for completion of the insolvency resolution process,has been set for
corporates and individuals. For companies, the process will have to be completed in 180 days, which
may be extended by 90 days, if a majority of the creditors agree. For start ups (other than
partnership firms), small companies and other companies (with asset less than Rs. 1 crore),
resolution process would be completed within 90 days of initiation of request which may be extended
by 45 days.[10]
Insolvency regulator: The Code establishes the Insolvency and Bankruptcy Board of India, to
oversee the insolvency proceedings in the country and regulate the entities registered under it. The
Board will have 10 members, including representatives from the Ministries of Finance and Law, and
the Reserve Bank of India.[9]
Insolvency professionals: The insolvency process will be managed by licensed professionals.
These professionals will also control the assets of the debtor during the insolvency process. [9]
Bankruptcy and Insolvency Adjudicator: The Code proposes two separate tribunals to oversee
the process of insolvency resolution, for individuals and companies: (i) the National Company Law
Tribunal for Companies and Limited Liability Partnership firms; and (ii) the Debt Recovery Tribunal
for individuals and partnerships.
Contractionary Monetary Policy
One popular method of controlling inflation is through a contractionary monetary
policy. The goal of a contractionary policy is to reduce the money supply within an
economy by decreasing bond prices and increasing interest rates. This helps
reduce spending because when there is less money to go around, those who
have money want to keep it and save it, instead of spending it. It also means that
there is less available credit, which can also reduce spending. Reducing
spending is important during inflation because it helps halt economic growth and,
in turn, the rate of inflation.
There are three main tools to carry out a contractionary policy. The first is to increase interest
rates through the central bank, in the case of the U.S., that's the Federal Reserve. The Fed Funds
Rate is the rate at which banks borrow money from the government, but, in order to make
money, they must lend it at higher rates. So, when the Federal Reserve increases its interest rate,
banks have no choice but to increase their rates as well. When banks increase their rates, fewer
people want to borrow money because it costs more to do so while that money accrues at a
higher interest. So, spending drops, prices drop and inflation slows.
Volume 75%
Reserve Requirements
The second tool is to increase reserve requirements on the amount of money
banks are legally required to keep on hand to cover withdrawals. The more
money banks are required to hold back, the less they have to lend to consumers.
If they have less to lend, consumers will borrow less, which will decrease
spending.
Cost-Push Inflation
Cost-push inflation occurs when prices increase due to increases in production
costs, such as raw materials and wages. The demand for goods is unchanged
while the supply of goods declines due to the higher costs of production. As a
result, the added costs of production are passed onto consumers in the form of
higher prices for the finished goods.
Wages also affect the cost of production and are typically the single biggest
expense for businesses. When the economy is performing well, and
the unemployment rate is low, shortages in labor or workers can occur.
Companies, in turn, increase wages to attract qualified candidates, causing
production costs to rise for the company. If the company raises prices due to the
rise in employee wages, cost-plus inflation occurs.
Natural disasters can also drive prices higher. For example, if a hurricane
destroys a crop such as corn, prices can rise across the economy since corn is
used in many products.
Demand-Pull Inflation
Demand-pull inflation can be caused by strong consumer demand for a product
or service. When there's a surge in demand for goods across an economy, prices
increase, and the result is demand-pull inflation. Consumer confidence tends to
be high when unemployment is low, and wages are rising—leading to more
spending. An economic expansion has a direct impact on the level of consumer
spending in an economy, which can lead to a high demand for products and
services.
Expansionary monetary policy by central banks can lower interest rates. Central
banks like the Federal Reserve can lower the cost for banks to lend, which allows
banks to lend more money to businesses and consumers. The increase in money
available throughout the economy leads to more spending and demand for goods
and services.
Some companies reap the rewards of inflation if they can charge more for their
products as a result of a surge in demand for their goods. If the economy is
performing well and housing demand is high, home-building companies can
charge higher prices for selling homes. In other words, inflation can provide
businesses with pricing power and increase their profit margins. If profit
margins are rising, it means the prices that companies charge for their products
are increasing at a faster rate than increases in production costs.
Also, business owners can deliberately withhold supplies from the market,
allowing prices to rise to a favorable level. However, companies can also be hurt
by inflation if it's the result of a surge in production costs. Companies are at risk if
they're unable to pass on the higher costs to consumers through higher prices. If
foreign competition, for example, is unaffected by the production cost increases,
their prices wouldn't need to rise. As a result, U.S. companies might have to eat
the higher production costs, otherwise, risk losing customers to foreign-based
companies.
Why is inflation so low?
This is lahis is largely due to low prices of food items, particularly onions and potatoes,
and fuel. In fact, retail prices of food items actually fell by 2.51% reflecting the excess
production from India’s agricultural sector.
While lower food prices are obviously a welcome developmentfor consumers, they can
hurt rural incomes. Low food inflation directly translates into lower earnings fortheir
commodities despite having similar costs for their inputs, which can make it harder for
them to repay their debt. This means lower consumption from rural India, weak
economic growth.
Low inflation also hurts people other than farmers. If businesses can’t raise the prices of
their products, they can’t increase wages, which keeps income growth stagnant.
if inflation is too low it raises concerns about a country’sGDP growth trajectory. Low
inflation means less liquidity in equity and debt markets, which will cause investors to
steer clear. It will do this in order to spur aggregate demand and consumer/business
confidence by making loans cheaper. An increase in credit-fuelled consumption will
provide a boost to the prices of items and economic growth as wages and profits rise.