Q1 What is a business cycle? Describe the different phases of a business cycle.

Ans:Business Cycle Business Cycle is waves of money and economic activity that forms a regular pattern, defined in terms of periods of expansion or recession. During expansions, the economy, measured by indicators like jobs, production, and sales, is growing in real terms, after excluding the effects of inflation. Recessions are periods when the economy is shrinking or contracting. Business Cycle Index Business Cycle Index is the cycle component of economics variables, the basic facts of business cycle index, they can be used for forecasting the economy. The Index is particular model of the economy. Most economic series expand and contract with general business in Thailand. They do not, however, movein perfect unison with the cycle in overall activity. The composite indexes are essentially averages of separate data series that cover a broad range of the economy. As averages, they tend to smooth out a good part of the volatility of the individual series and are useful summary measures for business cycle analysis and forecasting. The reason the leading index is called "leading% because the index shows cyclical turning points before those in aggregate economic activity. The main value o f the leading index is in signaling that either the risk of a recession has increased or that a recession may be coming to an end. Time Series Analysis An indispensable tool in monitoring current economic trends today, time series analysis is an indispensable element in monitoring and forecasting economic trends. This tool permits to adjust the economic time series for influences damaging the detection of the medium to longterm trend of a series. Such factors occurring in the original data may be seasonal influences, calendar influences or other irregular values which may be caused, for instance, by strikes. Consequently, most analytical methods aim at decomposing the observed time series data into components. These are the trend cycle component reflecting the medium to long-term "basic trend", a seasonal component and a calendar component through which seasonally and calendar adjusted values can be determined, and a residual component. Turning Point

The turning point is the dated that economy have been turn up or turn down activity, form recession to expansion or expansion to recession. Identifying turning points in the economy, is requires in two categories as the following: A recession is a significant decline in activity spread across the economy, lasting more than a few months, visible in industrial production, employment, real income, and wholesale-retail sales. A recession begins just after the economy reaches a peak of activity and ends as the economy reaches its trough. Between trough and peak, the economy is in an expansion. An expansion is the normal state of the economy, most recessions are brief and they have been rare in recent decades. Because a recession influences the economy broadly and is not confined to one sector, measures of economic activity. Peak: A peak marks the end of an expansion and the beginning of a recession. The determination of a peak date is thus a determination that the expansion that began. Trough: A trough date will mark the end of the recession. It will not issue any judgment about whether the economy has reached a trough until it makes its formal decision on this point. We waits for many months after an apparent trough to make its decision, because of data revisions and the possibility that the contraction would resume. Duration of Cycle : In business cycle term, a cycle is the stage of phase, or space of time occurrence on past cycle, its consisting of more related phases.The length of business cycles were not similar, some cycle happened long duration but some cycle happened in short duration.

Four Phases of Business Cycle Business Cycle (or Trade Cycle) is divided into the following four phases :1. 2. 3. 4. Prosperity Phase : Expansion or Boom or Upswing of economy. Recession Phase : from prosperity to recession (upper turning point). Depression Phase : Contraction or Downswing of economy. Recovery Phase : from depression to prosperity (lower turning Point).

Diagram of Four Phases of Business Cycle

The four phases of business cycles are shown in the following diagram :The business cycle starts from a trough (lower point) and passes through a recovery phase followed by a period of expansion (upper turning point) and prosperity. After the peak point is reached there is a declining phase of recession followed by a depression. Again the business cycle continues similarly with ups and downs.

Explanation of Four Phases of Business Cycle The four phases of a business cycle are briefly explained as follows :1. Prosperity Phase When there is an expansion of output, income, employment, prices and profits, there is also a rise in the standard of living. This period is termed as Prosperity phase. The features of prosperity are :1. 2. 3. 4. 5. 6. 7. 8. High level of output and trade. High level of effective demand. High level of income and employment. Rising interest rates. Inflation. Large expansion of bank credit. Overall business optimism. A high level of MEC (Marginal efficiency of capital) and investment.

Due to full employment of resources, the level of production is Maximum and there is a rise in GNP (Gross National Product). Due to a high level of economic activity, it causes a rise in prices and profits. There is an upswing in the economic activity and economy reaches its Peak. This is also called as a Boom Period.

2. Recession Phase The turning point from prosperity to depression is termed as Recession Phase. During a recession period, the economic activities slow down. When demand starts falling, the overproduction and future investment plans are also given up. There is a steady decline in the output, income, employment, prices and profits. The businessmen lose confidence and become pessimistic (Negative). It reduces investment. The banks and the people try to get greater liquidity, so credit also contracts. Expansion of business stops, stock market falls. Orders are cancelled and people start losing their jobs. The increase in unemployment causes a sharp decline in income and aggregate demand. Generally, recession lasts for a short period.

3. Depression Phase When there is a continuous decrease of output, income, employment, prices and profits, there is a fall in the standard of living and depression sets in. The features of depression are :1. 2. 3. 4. 5. 6. 7. 8. Fall in volume of output and trade. Fall in income and rise in unemployment. Decline in consumption and demand. Fall in interest rate. Deflation. Contraction of bank credit. Overall business pessimism. Fall in MEC (Marginal efficiency of capital) and investment.

In depression, there is under-utilization of resources and fall in GNP (Gross National Product). The aggregate economic activity is at the lowest, causing a decline in prices and profits until the economy reaches its Trough (low point).

4. Recovery Phase The turning point from depression to expansion is termed as Recovery or Revival Phase. During the period of revival or recovery, there are expansions and rise in economic activities. When demand starts rising, production increases and this causes an increase in investment. There is a steady rise in output, income, employment, prices and profits. The businessmen gain confidence and become optimistic (Positive). This increases investments. The stimulation of investment brings about the revival or recovery of the economy. The banks expand credit, business expansion takes place and stock markets are activated. There is an

increase in employment, production, income and aggregate demand, prices and profits start rising, and business expands. Revival slowly emerges into prosperity, and the business cycle is repeated. Conclusion: - Thus we see that, during the expansionary or prosperity phase, there is inflationand during the contraction or depression phase, there is a deflation.

Q2. What is monetary policy? Explain the general objectives and instruments of monetary policy. Ans:Meaning of Monetary Policy The term monetary policy is also known as the 'credit policy' or called 'RBI's money management policy' in India. How much should be the supply of money in the economy? How much should be the ratio of interest? How much should be the viability of money? etc. Such questions are considered in the monetary policy. From the name itself it is understood that it is related to the demand and the supply of money Definition of Monetary Policy Many economists have given various definitions of monetary policy. Some prominent definitions are as follows. According to Prof. Harry Johnson, "A policy employing the central banks control of the supply of money as an instrument for achieving the objectives of general economic policy is a monetary policy."

According to A.G. Hart, "A policy which influences the public stock of money substitute of public demand for such assets of both that is policy which influences public liquidity position is known as a monetary policy."

From both these definitions, it is clear that a monetary policy is related to the availability and cost of money supply in the economy in order to attain certain broad objectives. The Central Bank of a nation keeps control on the supply of money to attain the objectives of its monetary policy. Objectives of Monetary Policy

The objectives of a monetary policy in India are similar to the objectives of its five year plans. In a nutshell planning in India aims at growth, stability and social justice. After the Keynesian revolution in economics, many people accepted significance of monetary policy in attaining following objectives. 1. 2. 3. 4. 5. 6. 7. Rapid Economic Growth Price Stability Exchange Rate Stability Balance of Payments (BOP) Equilibrium Full Employment Neutrality of Money Equal Income Distribution

These are the general objectives which every central bank of a nation tries to attain by employing certain tools (Instruments) of a monetary policy. In India, the RBI has always aimed at the controlled expansion of bank credit and money supply, with special attention to the seasonal needs of a credit. Let us now see objectives of monetary policy in detail :1. Rapid Economic Growth : It is the most important objective of a monetary policy. The monetary policy can influence economic growth by controlling real interest rate and its resultant impact on the investment. If the RBI opts for a cheap or easy credit policy by reducing interest rates, the investment level in the economy can be encouraged. This increased investment can speed up economic growth. Faster economic growth is possible if the monetary policy succeeds in maintaining income and price stability. 2. Price Stability : All the economics suffer from inflation and deflation. It can also be called as Price Instability. Both inflation are harmful to the economy. Thus, the monetary policy having an objective of price stability tries to keep the value of money stable. It helps in reducing the income and wealth inequalities. When the economy suffers from recession the monetary policy should be an 'easy money policy' but when there is inflationary situation there should be a 'dear money policy'. 3. Exchange Rate Stability : Exchange rate is the price of a home currency expressed in terms of any foreign currency. If this exchange rate is very volatile leading to frequent ups and downs in the exchange rate, the international community might lose confidence in our economy. The monetary policy aims at maintaining the relative stability in the exchange rate. The RBI by altering the foreign exchange reserves tries to influence the demand for foreign exchange and tries to maintain the exchange rate stability. 4. Balance of Payments (BOP) Equilibrium : Many developing countries like India suffers from the Disequilibrium in the BOP. The Reserve Bank of India through its monetary policy tries to maintain equilibrium in the balance of payments. The BOP has two aspects i.e. the 'BOP Surplus' and the 'BOP Deficit'. The former reflects an excess money supply in the domestic economy, while the later stands for stringency

of money. If the monetary policy succeeds in maintaining monetary equilibrium, then the BOP equilibrium can be achieved. 5. Full Employment : The concept of full employment was much discussed after Keynes's publication of the "General Theory" in 1936. It refers to absence of involuntary unemployment. In simple words 'Full Employment' stands for a situation in which everybody who wants jobs get jobs. However it does not mean that there is a Zero unemployment. In that senses the full employment is never full. Monetary policy can be used for achieving full employment. If the monetary policy is expansionary then credit supply can be encouraged. It could help in creating more jobs in different sector of the economy. 6. Neutrality of Money : Economist such as Wicksted, Robertson have always considered money as a passive factor. According to them, money should play only a role of medium of exchange and not more than that. Therefore, the monetary policy should regulate the supply of money. The change in money supply creates monetary disequilibrium. Thus monetary policy has to regulate the supply of money and neutralize the effect of money expansion. However this objective of a monetary policy is always criticized on the ground that if money supply is kept constant then it would be difficult to attain price stability. 7. Equal Income Distribution : Many economists used to justify the role of the fiscal policy is maintaining economic equality. However in resent years economists have given the opinion that the monetary policy can help and play a supplementary role in attainting an economic equality. monetary policy can make special provisions for the neglect supply such as agriculture, small-scale industries, village industries, etc. and provide them with cheaper credit for longer term. This can prove fruitful for these sectors to come up. Thus in recent period, monetary policy can help in reducing economic inequalities among different sections of society.

Q3. A firm supplied 3000 pens at the rate of Rs 10. Next month, due to a rise of in the price to 22 rs per pen the supply of the firm increases to 5000 pens. Find the elasticity of supply of the pens. Ans:First we need to find the data we need. We know that the original price is Rs.10 and the new price is Rs.22, so we have Price (OLD)=Rs.10 and Price(NEW)=Rs.22.We see that the quantity supplied when the price is Rs.10 is 3000 and when the price is Rs.22 is 5000. Since we're going from Rs.10 to Rs.22, we have Quantity Supply (OLD)=3000 and Quantity Supply (NEW)=5000, So we have: Price(OLD)=9 Price(NEW)=10 Quantity Supply (OLD)=3000 Quantity Supply (NEW)=5000

To calculate the price elasticity, we need to know what the percentage change in quantity supply is and what the percentage change in price is. It's best to calculate these one at a time. Calculating the Percentage Change in Quantity Supply The formula used to calculate the percentage change in quantity supplied is: [Quantity Supply (NEW) - Quantity Supply (OLD)] / Quantity Supply (OLD) By filling in the values we wrote down, we get: [5000 - 3000] / 3000 = (2000/3000) = 0.667 So we note that % Change in Quantity Supplied = 0.667 (This is in decimal terms. In percentage terms it would be 66.7%). Now we need to calculate the percentage change in price. Calculating the Percentage Change in Price Similar to before, the formula used to calculate the percentage change in price is: [Price(NEW) - Price(OLD)] / Price(OLD) By filling in the values we wrote down, we get: [22 - 10] / 10 = (12/10) = 1.2 We have both the percentage change in quantity supplied and the percentage change in price, so we can calculate the price elasticity of supply. Final Step of Calculating the Price Elasticity of Supply We go back to our formula of: PEoS = (% Change in Quantity Supplied)/(% Change in Price) We now fill in the two percentages in this equation using the figures we calculated. PEoD = (0.667)/(1.2) = .56

Note :-When we analyze price elasticities we're concerned with the absolute value, but here that is not an issue since we have a positive value.

Q4. Give a brief description of a) Implicit and explicit cost b) Actual and opportunity cost Ans:a) Implicit and explicit cost

Implicit Cost
Implicit cost is a cost that is represented by the lost opportunity in the use of a company's own resources, excluding cash. The implicit cost are the costs of an enterprise that does not require direct expenditure, it results from a loss in the potential revenue. The implicit costs results if a person is willing to forego the satisfaction in the search of an activity and is not rewarded by money and in any other form of payment. It begins and ends with foregoing the satisfaction and benefits. An implicit cost is an indirect intangible cost. An example of an implicit cost is Goodwill. Implicit cost is the cost that is associated with an actions tradeoff. It represents the explicit cost, which is the actual cost of an activity and is related to a cost that is not recorded but is instead applied. For example, if an employee goes on a vacation, the explicit costs represent the expenses of the hotel room and other costs. Whereas the implicit costs indicates the tradeoff, i.e. the salary that the employee could have earned if he had not gone for a vacation. The implicit cost for some enterprises is the result of the total time taken by a person to complete the project and the value of that person s time. For example if a contractor hires a plumber to complete a job. The contractor must charge enough to cover both the implicit and explicit costs to make a profit. Implicit costs cannot be traded and hence it cannot be counted in terms of money. Implicit cost is an important concept in determining the cost of completing projects. If a person does an extra work added to his or her work without an extra pay, then he/ she incurs an implicit cost. In case another person is hired to do the work, then an explicit cost is incurred as the hired person would be paid the wages.

Explicit Cost A direct expense that a business incurs in conducting an activity. Examples of explicit costs include salaries, wages, materials, etc. An explicit cost can be recurring, or it can be a one-off expense. Likewise, it can be predictable, like the rent, or it can vary from time to time, like the electric bill. Less commonly, an explicit cost is called an outlay cost. In other words. Explicit costs are those costs which are in the nature of contractual payments and are paid by an entrepreneur to the factors of production [excluding himself] in the form of

rent, wages, interest and profis, utility expenses and payment for raw materials etc. They can be estimated and calculated exactly and recorded in the books of accounts.
Actual Cost Actual costs are also called as outlay costs, absolute costs and acquisition costs. They are those costs that involve financial expenditures at some time and hence recorded in the books of accounts. They are the actual expenses incurred for producing or acquiring a commodity or service by a firm. For example, wages paid to workers, expenses on row materials, powers, fuel and other types of inputs. They can be exactly calculated and accounted without any difficulty.

Oppurtunity Cost This concept of scarcity leads to the idea of opportunity cost. The opportunity cost of an action is what you must give up when you make that choice. Another way to say this is: It is the value of the next best opportunity. Opportunity cost is a direct implication of scarcity. People have to choose between different alternatives when deciding how to spend their money and their time. Milton Friedman, who won the Nobel Prize for Economics, is fond of saying "there is no such thing as a free lunch." What that means is that in a world of scarcity, everything has an opportunity cost. There is always a trade-off involved in any decision you make. The concept of opportunity cost is one of the most important ideas in economics. Consider the question, How much does it cost to go to college for a year? We could add up the direct costs like tuition, books, school supplies, etc. These are examples of explicit costs, i.e., costs that require a money payment. However, these costs are small compared to the value of the time it takes to attend class, do homework, etc. The amount that the student could have earned if she had worked rather than attended school is the implicit cost of attending college. Implicit costs are costs that do not require a money payment. The opportunity cost includes both explicit and implicit costs. Explicit costs are costs that require a money payment. Implicit costs are costs that do not require a money payment. Opportunity cost includes both explicit and implicit costs.