Preface to the Second Edition vii Preface to the First Edition ix

PART 1
Introduction and Measurement

1. Introduction: An Overview 3
1.1 Economics 3
1.2 Microeconomics and Macroeconomics 7
1.3 Methodology in Economics 8
1.4 Theory of Aggregation 12
1.5 Macroeconomic Goals and Instruments 13
1.6 Subject Matter of Macroeconomics 17
1.7 Indian Economy vis-à-vis the World Economy 18
References 20
Review Questions 21

2. National Income 22 2.1 Income Concepts 22
2.2 Economic Units and Circular Flow of Income 28
2.3 Income Measurements 30
2.4 Nominal and Real Income 35
2.5 Measured and PPP Income 35
2.6 Income and Human Development Index 36
2.7 Income and Welfare 37
References 41
Review Questions 41

3. Inflation, Unemployment and Poverty 44 3.1 Inflation 44
3.2 Unemployment 56
3.3 Poverty 62
3.4 Income Inequality 64
References 66
Review Questions 66

4. Money, Fiscal and Foreign Sector Variables 69 4.1 Money and Liquidity Magnitudes 68
4.2 Interest Rates 72
4.3 Fiscal Magnitudes 74
4.4 Foreign Sector Magnitudes 76
References 91
Review Questions 91

PART II
Behavioural and Technological Functions

5. Consumption Function 97 5.1 Components of Consumption 98
5.2 Determinants of Consumption 98
5.3 Consumption Function 112
5.4 Conclusion 112
References 113
Review Questions 113

6. Investment Function 115 6.1 Components of Investments 116
6.2 Motivation of Investment 117
6.3 Investments and Capital 118
6.4 Determinants of Investment 119
6.5 Investment Function 127
6.6 Conclusion 128
References 128
Review Questions 129

7. Government, Foreign Trade and Foreign Exchange Rate Functions 130 7.1 Government Sector 130
7.2 Net Exports and Globalisation 133
7.3 Open Economy 134
7.4 Net Exports, Income Identity, and Saving Investment Gap 136
7.5 Determinants of Net Export/Trade 136
7.6 Net Export Function 139
7.7 Globalisation and Business Process Outsourcing 143
7.8 Foreign Exchange Rate System 146
7.9 Determinants of Foreign Exchange Rate 150
7.10 International Financial Institutions 155
7.11 Conclusion 156
References 157
Review Questions 157

8. Money Demand and Supply Functions 160 8.1 Demand for Money 161
8.2 Supply of Money 168
8.3 Regulation of Money Supply and Instruments of Monetary Policy 177
8.4 Conclusion 184
References 184
Review Questions 185

9. Production Function, Factor Market and Aggregate Supply Function 187 9.1 Production Function 190
9.2 Demands for Factors of Production 192
9.3 Supply of Factors of Production 195
9.4 Factor Market Equilibrium 198
9.5 Aggregate Supply Function 200
9.6 Phillips Curve 210
9.7 Phillips Curve vis-a-vis Aggregate Supply Function 214
9.8 Price Expectations’ Models 216
9.9 Conclusion 218
References 219
Review Questions 219

PART III
Economic Fluctuations and Stabilization Policy:
Macroeconomic Models

10. Business Cycles, Stabilisation Policies and Economic Models 223 10.1 Business Cycles 223
10.2 Stabilisation Policies 230
10.3 Macroeconomic Models 239
References 241
Review Questions 241

11. Classical and Keynesian Fixed Price Models 243 11.1 Classical Model 243
11.2 Keynesian Cross Model 248
11.3 Keynesian IS-LM Model 258
11.4 Applications of the Keynesian Model 272
11.5 Conclusion 272
References 273
Review Questions 273

12. Keynesian Flexible Price Model, Open Economy and Policy Debates 276 12.1 Keynesian Flexible Price Model 276
12.2 Open Economy 289
12.3 Supply Shocks and Supply Side Economics 296
12.4 Policy Lags and Discretionary versus Rule Based Policy 300
12.5 Fiscal Policy vis-à-vis Monetary Policy 302
12.6 Conclusion 305
References 306
Review Questions 306

13. New Classical and New Keynesian Models 308 13.1 New Classical Model 309
13.2 New Keynesian Model 322
13.3 Conclusion 327
References 330
Review Questions 330

14. Unemployment and Inflation: Causes, Consequences and Cures 333 14.1 Unemployment—Definition 334
14.2 Causes of Unemployment 334
14.3 Consequences of Unemployment 339
14.4 Cures for Unemployment 342
14.5 Inflation—Definition 344
14.6 Causes of Inflation 345
14.7 Consequences of Inflation 350
14.8 Cures for Inflation 358
14.9 Conclusion 361
References 362
Review Questions 362

PART IV
Economic Growth and the State of Macroeconomics

15. Economic Growth 367 15.1 Determinants of Income and Growth 369
15.2 Harrod-Domar Model 370
15.3 Solow Model 371
15.4 Golden Rule 380
15.5 Limitations of the Solow Model 382
15.6 Endogenous Growth Theory 385
15.7 Evidences on Sources of Growth 393
15.8 Limits to Economic Growth 394
15.9 Conclusion 395
References 39
7 Review Questions 398

16. State of Macroeconomics 399 16.1 Measurement of Economic Variables 399
16.2 Business Cycles and Stabilisation Policies 401
16.3 Economic Growth 404
16.4 Conclusion 406
Review Questions 408

Appendix I: Multiple Choice Questions 409
Appendix II: Fill in the Blanks Questions 420
Answers to Numerical Questions 424
Index
426