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What Is Macroeconomics?
Macroeconomics is a branch of economics that studies the behavior of an overall economy,
which encompasses markets, businesses, consumers, and governments
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Microeconomics
Macroeconomics differs from microeconomics, which focuses on smaller factors that affect
choices made by individuals
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These actors interact with each other according to the
laws of supply and demand for resources, using money and interest rates as pricing
mechanisms for coordination
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A key distinction between microeconomics and macroeconomics is that macroeconomic
aggregates can sometimes behave in very different ways or even the opposite of similar
microeconomic variables
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However,
when everyone tries to increase their savings at once, it can contribute to a slowdown in the
economy and less wealth in the aggregate, macroeconomic level
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Top 9 Importance of Macroeconomics
Brief outlines of the nine theoretical and practical importance of Macroeconomics are (1)
Functioning of an Economy, (2) Formulation of Economic Policies, (3) Understanding
Macroeconomics, (4) Understanding and Controlling Economic Fluctuations, (5) Inflat ion
and Deflation, (6) Study of National Income, (7) Study of Economic Development, (8)
Performance of an Economy, and (9) Nature of Material Welfare
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These include aggregate demand for goods and services,
employment, inflation, and economic growth
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Conversely, to combat inflation, it
may raise rates or cut spending to cool down the economy
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What Is Monetary Policy?
Monetary policy is a set of tools used by a nation's central bank to control the overall money supply and
promote economic growth and employ strategies such as revising interest rates and changing bank reserve
requirements
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Importance of Macroeconomics
1
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It describes how the
economy as a whole functions and how the level of national income and employment is determined on the
basis of aggregate demand and aggregate supply
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It helps to achieve the goal of economic growth, higher level of GDP and higher level of employment
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3
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It suggests
policy measures to control Inflation and deflation
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It explains factors which determine balance of payment
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5
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, whose solution
is possible at macro level only, i
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, at the level of whole economy
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With detailed knowledge of functioning of an economy at macro level, it has been possible to
formulate correct economic policies and also coordinate international economic policies
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Last but not the least, is that macroeconomic theory has saved us from the dangers of application of
microeconomic theory to the problems of the economy as a whole
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It includes both the public and private sectors and encompasses
everything from haircuts to housing, from medical care to national defence
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National income Formula is
Y = C + I + G + (X-M)
Y = national income C = consumption I = investment G = government spending
X = exports M = imports
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GNP is different from net national product,
which considers depreciation and the consumption of capital
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In 1991, the United States started using
GDP instead of GNP as its main way to measure economic output
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What Is Gross Domestic Product (GDP)?
Gross domestic product (GDP) is the total monetary or market value of all the finished goods
and services produced within a country’s borders in a specific time period
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types of GDP
GDP can be reported in several ways, each of which provides slightly different information
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In other words, it doesn’t strip out inflation or the pace of rising prices,
which can inflate the growth figure
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Nominal GDP is evaluated in either the local currency
or U
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dollars at currency market exchange rates to compare countries’ GDPs in purely
financial terms
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When
comparing the GDP of two or more years, real GDP is used
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Real GDP
Real GDP is an inflation-adjusted measure that reflects the number of goods and services
produced by an economy in a given year, with prices held constant from year to year to
separate out the impact of inflation or deflation from the trend in output over time
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Rising prices tend to increase a country’s GDP, but this does not necessarily reflect any
change in the quantity or quality of goods and services produced
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Economists use a process that adjusts for inflation to arrive at an economy’s real GDP
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This way, it is possible to
compare a country’s GDP from one year to another and see if there is any real growth
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For example, if prices rose by 5% since the base year,
then the deflator would be 1
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Nominal GDP is divided by this deflator, yielding real GDP
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2
Real GDP accounts for changes in market value and thus narrows the difference between
output figures from year to year
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What is inflation?
Inflation is the rate of increase in prices over a given period of time
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During deflation, the purchasing
power of currency rises over time
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Labor, capital,
land, and entrepreneurship are the four main components of production
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Furthermore, certain self-employed individuals, such as doctors, lawyers, and accountants,
use their own labour and capital
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NDP at
factor costs is the total of all of these factor incomes
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Product/ Value Added Method
National income is calculated using this method as a flow of goods and services
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The term "final goods" refers to goods that are consumed immediately rather than
being employed in a subsequent manufacturing process
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Because the value
of intermediate products is already included in the value of final goods, we do not count the
value of intermediate goods in national income; otherwise, the value of goods would be
double-counted
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e
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The sum-total is the GDP at market prices since the money value is measured at market
prices
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The flow of goods and services is used to calculate national income
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It was first introduced by British
economist John Maynard Keynes, who argued that the function could be used to predict total
aggregate consumption expenditure
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Calculating the Consumption Function
The consumption function is represented as:

C = A + MDwhere:C=consumer spendingA=autonomous consumptionM=marginal propensity to consume
D=real disposable income
C = A + MDwhere:C=consumer spendingA=autonomous consumptionM=marginal propensity to consume
D=real disposable income
Linear Consumption Function:
There are two important concepts of propensity to consume, the one being average
propensity to consume and the other marginal propensity to consume
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Consider Table 9
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Consumption changes as income changes
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Thus, propensity to consume of a community can be known by the average and
marginal propensity to consume
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Therefore, average propensity to consume is calculated by dividing the amount of
consumption by the total income

Non-Linear Consumption Function:
In the consumption function depicted in Fig
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3, though average propensity to
consume(C/Y) declines, marginal propensity to consume which equals ∆C/∆Y remains
constant since consumption function curve CC is a straight line and therefore its slope
(∆C/∆Y)is constant
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We have constructed in Table 9
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Marginal Propensity to Consume:
The concept of marginal propensity to consume is very important, because from it we can
know how much part of the increment in income is consumed and how much saved
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Central banks in many advanced economies set
explicit inflation targets
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Central banks conduct monetary policy by adjusting the supply of money, usually through
buying or selling securities in the open market
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When central
banks lower interest rates, monetary policy is easing
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Tool of monetary policy?

Central banks have four main monetary policy tools: the reserve requirement, open market
operations, the discount rate, and interest on reserves
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Louis
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Most central banks also have a lot more tools at their disposal
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By utilizing a combination of these methods,
central banks aim to influence economic activity and maintain financial stability
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Reserve Requirement
The reserve requirement refers to the money banks must keep on hand overnight
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A low reserve requirement allows
banks to lend more of their deposits
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Open Market Operations
Open market operations are when central banks buy or sell securities
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When the central bank buys securities, it adds cash to
the banks' reserves
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When the central bank sells the
securities, it places them on the banks' balance sheets and reduces its cash holdings
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A central bank buys securities when it wants an expansionary monetary
policy
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Discount Rate
The discount rate is the rate that central banks charge their member banks to borrow at
their discount window
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Interest Rate on Excess Reserves
The fourth tool was created in response to the 2008 financial crisis
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11 If the Fed wants banks to lend more, it lowers the rate paid on excess reserves
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1
Federal Reserve Bank of S

Types of Inflation

Stagflation
Stagflation (a time of economic stagnation combined with inflation) can wreak havoc
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Types of Inflation
The different types of inflation in an economy can be explained as follows:
Demand-Pull Inflation
This type of inflation is caused due to an increase in aggregate demand in the
economy
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This leads to a steady
increase in demand, which means higher prices
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Government spending or Deficit financing by the government – When the
government spends more freely, prices go up
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Increased borrowing
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Low unemployment rate
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The overall increase in the cost of living
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Because
the National Income is reduced along with the reduction in supply in the Cost-push
type of inflation
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Wholesale Price Index (WPI) – It is estimated by the Ministry of Commerce &
Industry and measured on a monthly basis
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Consumer Price Index (CPI) – It is calculated by taking price changes for each
item in the predetermined lot of goods and averaging them
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Producer Price Index – It is a measure of the average change in the selling
prices over time received by domestic producers for their output
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Commodity Price Indices – It is a fixed-weight index or (weighted) average of
selected commodity prices, which may be based on spot or futures price
5
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It is a way to measure the underlying inflation trends
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GDP deflator – It is a measure of general price inflation

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What Is Absolute Advantage?
Absolute advantage is the ability of an individual, company, region, or country to produce a
greater quantity of a good or service with the same quantity of inputs per unit of time, or to

produce the same quantity of a good or service per unit of time using a lesser quantity of
inputs, than its competitors
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Comparative Advantage
Absolute advantage can be contrasted with comparative advantage, which is when a producer
has a lower opportunity cost to produce a good or service than another producer
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2
Absolute advantage leads to unambiguous gains from specialization and trade only in cases
where each producer has an absolute advantage in producing some good
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What Is Comparative Advantage?
Comparative advantage is an economy's ability to produce a particular good or service at a
lower opportunity cost than its trading partners
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What is trade
Trade means the exchange of goods or services between two different parties
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The Merriam-Webster dictionary
defines it as “the buying and selling or bartering of commodities
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Domestic trade refers to the trade that
happens within a nation, and trade between nations is called international trade
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Every country is not endowed with all the resources it needs to
sustain itself
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While trading initially happened only with goods, trade in
services among nations has also increased by a significant amount in the areas of
banking, telecommunications, and information technology, among other servicebased sectors
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For the United States, the main
goal of trade agreements is to reduce barriers to U
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exports, protect U
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interests competing
abroad, and enhance the rule of law in the FTA partner country or countries
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Increased efficiency
The good thing about a free trade area is that it encourages competition, which consequently
increases a country’s efficiency, in order to be on par with its competitors
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2
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Efficient use of resources means maximizing profit
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No monopoly
When there is free trade, and tariffs and quotas are eliminated, monopolies are also eliminated
because more players can come in and join the market
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Lowered prices
When there is competition, especially on a global level, prices will surely go down, allowing
consumers to enjoy a higher purchasing power
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Increased variety
With imports becoming available at a lower cost, consumers gain access to a variety of products
that are inexpensive
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Threat to intellectual property
When imports are freely traded, domestic producers are often able to copy the products and sell
them as knock-offs without fear of any legal repercussions
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2
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Because
many countries lack labor protection laws, workers may be forced to work in unhealthy and
substandard work environments
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Less tax revenue
Since member countries are no longer subject to import taxes, they need to think of ways to
compensate for the reduced tax revenue
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The fee is in the form of a
tax or duty which is referred to as a Tariff Barrier
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The tariff is paid to the customs authorities of the country
where the goods are being sent
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It includes constraints that result in prohibition,
formalities, or circumstances that make imports of commodities difficult and reduce market
potential for foreign products
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It might be in the form of laws, policies, practices,
conditions, and requirements imposed by the government to limit imports
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e
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Non-tariff barriers include all
the limitations other than taxes
imposed by the government on imports in
order to protect domestic enterprises and
discriminate against new entrants
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Import quotas and voluntary export
barriers were eliminated by the World
Trade Organisation
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Non-tariff barriers are implicit in nature
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Non-tariff barriers are imposed in the
form of Regulations, Conditions,
Requirements, Formalities, etc
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Non-tariff barriers do not generate
revenue for the government
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Non-tariff barriers affect the quantity or
price or both of the imported goods
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The monopolistic organisation charges
high rates for low output
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Importers can make high profits through
non-tariff barriers
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Import Licensing, Foreign Exchange
Regulations, Import Quotas, etc
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This guide provides an overview of how
public finances are managed, what the various components of public finance are, and how to
easily understand what all the numbers mean
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Objectives of public financial?
Public financial management (PFM) plays a critical role in ensuring the effective allocation, utilization,
and monitoring of government financial resources
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Efficient Resource Allocation: Ensuring that public funds are allocated according to government
priorities to maximize societal welfare
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2
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This includes controlling budget deficits, ensuring debt sustainability,
and avoiding excessive public debt
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Accountability and Transparency: Promoting accountability by establishing clear processes for
the use of public funds
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4
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This involves minimizing waste, inefficiencies, and corruption
in public financial operations
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Revenue Optimization: Ensuring that the government collects sufficient revenue to meet its
expenditure needs while promoting equity and fairness in taxation and other revenue collection
methods
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Macroeconomic Stability: Supporting stable and sustainable economic growth by maintaining
fiscal balance, controlling inflation, and managing public debt levels effectively
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Financial Sustainability: Ensuring that the government can meet its current and future financial
obligations without compromising its ability to provide services
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Equity and Inclusiveness: Promoting social equity by ensuring that public financial resources
are distributed in a way that benefits all citizens, especially vulnerable populations, and reduces
inequalities
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Risk Management: Identifying and mitigating financial risks, such as revenue shortfalls or
unforeseen expenditures, to ensure smooth fiscal operations and avoid crises
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n economics, goods are categorized into many different ways based on excludability
and rivalrousness
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Whereas, rivalrousness of a
particular good is determined depending on whether individuals can consume these
goods without affecting their availability for the other individuals
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What are Public Goods?
Public good is a term in economics which refers to the good (commodity) that is
available for use for everybody and one person’s usage of it does not diminish or
exhaust its availability to others
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Public goods are provided as a whole to the society by the government
and the consumption of these goods by an individual doesn’t reduce its availability
or doesn’t exclude others from consuming it
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What is a Private Good?

Any product which must be purchased for consumption, and which prevents another
individual from consuming it if consumed by one individual is known as a private
good
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Difference between Public Goods and Private Goods
The public goods and private goods vary from each other on the basis of
excludability and rivalrousness
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It is rivalrous as the consumption of one
unit of private goods by one person does
decrease the available units for
consumption by another person
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A good is said to be nonexcludable if it is impossible, or extremely costly,
to prevent someone from benefiting from that
particular good who has not paid for it
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What is meant by barter system?
The barter system incorporates the exchange of commodities between two or more parties
without using money
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What Is Narrow Money?
Narrow money is a category of money supply that includes all physical money such as coins
and currency, demand deposits, and other liquid assets held by the central bank
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It is
defined as the most inclusive method of calculating a given country's money supply and
includes narrow money along with other assets that can be easily converted into cash to buy
goods and services
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It was developed by British economist John
Maynard Keynes during the 1930s in an attempt to deal with the effects of the Great
Depression
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Keynes’ theory was the first to sharply separate the study of economic behavior and
individual incentives from the study of broad aggregate variables and constructs
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Subsequently, Keynesian economics was used to refer to the concept that optimal economic
performance could be achieved—and economic slumps could be prevented—by influencing
aggregate demand through economic intervention by the government
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What is Foreign Exchange Rate?
Foreign Exchange Rate is defined as the price of the domestic currency with respect
to another currency
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Foreign exchange rate can also be said to be the rate at which one currency is
exchanged with another or it can be said as the price of one currency that is stated
in terms of another currency
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Fixed exchange rate is
determined by the central bank of the country while the floating rate is determined
by the dynamics of market demand and supply
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The economic factors that are known to cause variation in
foreign exchange rates are inflation, trade balances, government policies
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Psychological factors that impact the forex rate is the psychology of the participants
involved in foreign exchange
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Fixed exchange rate System or Pegged exchange rate system: The pegged
exchange rate or the fixed exchange rate system is referred to as the system where
the weaker currency of the two currencies in question is pegged or tied to the
stronger currency
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To maintain the stability in the currency rate, there is purchasing of foreign exchange
by the central bank or government when the rate of foreign currency increases and
selling foreign currency when the rates fall
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Advantages of Fixed Exchange Rate System
Following are some of the advantages of fixed exchange rate system
1
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3
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4
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Disadvantages of Fixed Exchange Rate System
Following are some of the disadvantages of the fixed exchange rate system
1
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2
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2
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There is no intervention of the central banks or the government in the
floating exchange rate system
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There is no need to maintain foreign reserves in this exchange system
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Any deficiencies or surplus in Balance of Payment is automatically corrected in this
system
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It encourages speculation that may lead to fluctuations in the exchange rate of
currencies in the market
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If the fluctuations in exchange rates are too much it can cause issues with
movement of capital between countries and also impact foreign trade
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It will discourage any type of international trade and foreign investment
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Managed floating exchange rate system: Managed floating exchange rate
system is the combination of the fixed (managed) and floating exchange rate
systems
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This article was all about the topic of Foreign Exchange Rate, which is an important
topic in Business Studies for Commerce students
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