This section gives you a platform for understanding issues such as inflation, economic growth and unemployment.

Aggregate demand (AD) and aggregate supply (AS) analysis provides a way of illustrating macroeconomic relationships and the effects of government policy changes. Aggregate Demand The identity for calculating aggregate demand (AD) is as follows: AD Where = C + I + G + (X-M)

C: Consumers' expenditure on goods and services: This includes demand for consumer durables (e.g. washing machines, audio-visual equipment and motor vehicles & non-durable goods such as food and drinks which are consumed and must be re-purchased). Household spending accounts for over sixty five per cent of aggregate demand in the UK. I: Capital Investment This is investment spending by companies on capital goods such as new plant and equipment and buildings. Investment also includes spending on working capital such as stocks of finished goods and work in progress. Capital investment spending in the UK typically accounts for between 15-20% of GDP in any given year. Of this investment, 75% comes from private sector businesses such as Tesco, British Airways and British Petroleum and the remainder is spent by the public (government) sector for example investment by the government in building new schools or investment in improving the railway or road networks. So a mobile phone company such as O2 spending 100 million on extending its network capacity and the government allocating 15 million of funds to build a new hospital are both counted as part of capital investment. Investment has important long-term effects on the s supply-side of the economy as well as being an important although volatile component of aggregate demand. G: Government Spending This is government spending on state-provided goods and services including public and merit goods. Decisions on how much the government will spend each year are affected by developments in the economy and also the changing political priorities of the government. In a normal year, government purchases of goods and services accounts for around twenty per cent of aggregate demand. We will return to this again when we look at how the government runs its fiscal policy. Transfer payments in the form of welfare benefits (e.g. state pensions and the job-seekers allowance) are not included in general government spending because they are not a payment to a factor of production for any output produced. They are simply a transfer from one group within the economy (i.e. people in work paying income taxes) to another group (i.e. pensioners drawing their state pension having retired from the labour force, or families on low incomes). The next two components of aggregate demand relate to international trade in goods and services between the UK economy and the rest of the world. X: Exports of goods and services - Exports sold overseas are an inflow of demand (an injection) into our circular flow of income and therefore add to the demand for UK produced output. M: Imports of goods and services. Imports are a withdrawal of demand (a leakage) from the circular flow of income and spending. Goods and services come into the economy for us to consume and enjoy but there is a flow of money out of the economy to pay for them. Net exports (X-M) reflect the net effect of international trade on the level of aggregate demand.

When net exports are positive, there is a trade surplus (adding to AD); when net exports are negative, there is a trade deficit (reducing AD). The UK economy has been running a large trade deficit for several years now as has the United States. Aggregate demand shocks

Economic events such as changes in interest rates and economic growth in the United States can have a powerful effect on other countries including the UK. This is because the USA is the worlds largest economy. 15 per cent of our exports go to the USA. Lots of unexpected events can happen which cause changes in the level of demand, output and employment in the economy. These unplanned events are called shocks One of the causes of fluctuations in the level of economic activity is the presence of demand-side shocks. Some of the main causes of demand-side shocks are as follows: A capital investment boom e.g. a construction boom to increase the supply of new houses or to build new commercial and industrial buildings. A rise or fall in the exchange rate affecting net export demand and having follow-on effects on output, employment, incomes and profits of businesses linked to export industries. A consumer boom abroad in the country of one of our major trading partners which affects the demand for our exports of goods and services. A large boom in the housing market or a slump in share prices. An unexpected cut or an unexpected rise in interest rates.

The Aggregate Demand Curve The AD curve shows the relationship between the general price level and real GDP.

Why does the AD curve slope downwards? There are several explanations for an inverse relationship between aggregate demand and the price level in an economy. These are summarised below: Falling real incomes: As the price level rises, so the real value of peoples incomes fall and consumers are then less able to afford UK produced goods and services. The balance of trade: As the price level rises, foreign-produced goods and services become more attractive (cheaper) in price terms, causing a fall in exports and a rise in imports. This will lead to a reduction in trade (X-M) and a contraction in aggregate demand. Interest rate effect: if in the UK the price level rises, this causes an increase in the demand for money and a consequential rise in interest rates with a deflationary effect on the entire economy. This assumes that the central bank (in our case the Bank of England) is setting interest rates in order to meet a specified inflation target.

Shifts in the AD curve A change in factors affecting any one or more components of aggregate demand, households (C), firms (I), the government (G) or overseas consumers and business (X) changes planned aggregate demand and results in a shift in the AD curve. Consider the diagram below which shows an inward shift of AD from AD1 to AD3 and an outward shift of AD from AD1 to AD2. The increase in AD might have been caused for example by a fall in interest rates

or an increase in consumers wealth because of rising house prices.

Factors causing a shift in AD Changes in Expectations The expectations of consumers and businesses can have a powerful effect on Current spending is affected by planned spending in the economy E.g. expected increases in consumer anticipated future income, profit, incomes, wealth or company profits encourage households and firms to spend and inflation more boosting AD. Similarly, higher expected inflation encourages spending now before price increases come into effect - a short term boost to AD. When confidence turns lower, we expect to see an increase in saving and some companies deciding to postpone capital investment projects because of worries over a lack of demand and a fall in the expected rate of profit on investments. Changes in Monetary Policy i.e. a An expansionary monetary policy will cause an outward shift of the AD curve. If change in interest rates interest rates fall this lowers the cost of borrowing and the incentive to save, (Note there is more than one thereby encouraging consumption. Lower interest rates encourage firms to interest rate in the economy, borrow and invest. although borrowing and savings rates There are time lags between changes in interest rates and the changes on the tend to move in the same direction) components of aggregate demand. Changes in Fiscal Policy For example, the Government may increase its expenditure e.g. financed by a Fiscal Policy refers to changes in higher budget deficit, this directly increases AD government spending, welfare benefits and taxation, and the Income tax affects disposable income e.g. lower rates of income tax raise amount that the government borrows disposable income and should boost consumption. An increase in transfer payments raises AD particularly if welfare recipients spend a high % of the benefits they receive.

Economic events in the A fall in the value of the pound () (a depreciation) makes imports dearer and international economy exports cheaper thereby discouraging imports and encouraging exports the International factors such as the net result should be that UK AD rises the impact depends on the price exchange rate and foreign income elasticity of demand for imports and exports and also the elasticity of supply of (e.g. the economic cycle in other UK exporters in response to an exchange rate depreciation. countries) An increase in overseas incomes raises demand for exports and therefore UK AD rises. In contrast a recession in a major export market will lead to a fall in UK

exports and an inward shift of aggregate demand. The UK is an open economy, meaning that a large and rising share of our national output is linked to exports of goods and services or is open to competition from imports. Changes in household wealth A rise in house prices or the value of shares increases consumers wealth and Wealth refers to the value of assets allow an increase in borrowing to finance consumption increasing AD. In owned by consumers e.g. houses and contrast, a fall in the value of share prices will lead to a decline in household shares financial wealth and a fall in consumer demand.

. Since 1983, the RBI's responsibility with respect to regional rural banks was transferred to A.ARDC B. SBI C. NABARD D.PACs

Aggregate Demand (AD) Curve

In macroeconomics, the focus is on the demand and supply of all goods and services produced by an economy. Accordingly, the demand for all individual goods and services is also combined and referred to as aggregate demand. The supply of all individual goods and services is also combined and referred to as aggregate supply. Like the demand and supply for individual goods and services, the aggregate demand and aggregate supply for an economy can be represented by a schedule, a curve, or by an algebraic equation

The aggregate demand curve represents the total quantity of all goods (and services) demanded by the economy at different price levels. An example of an aggregate demand curve is given in Figure 1 .

Figure 1 An aggregate demand curve

The vertical axis represents the price level of all final goods and services. The aggregate price level is measured by either the GDP deflator or the CPI. The horizontal axis represents the real quantity of all goods and services purchased as measured by the level of real GDP. Notice that the aggregate demand curve, AD, like the demand curves for individual goods, is downward sloping, implying that there is an inverse relationship between the price level and the quantity demanded of real GDP. The reasons for the downward-sloping aggregate demand curve are different from the reasons given for the downward-sloping demand curves for individual goods and services. The demand curve for an individual good is drawn under the assumption that the prices of other goods remain constant and the assumption that buyers' incomes remain constant. As the price of good X rises, the demand for good X falls because the relative price of other goods is lower and because buyers' real incomes will be reduced if they purchase good X at the higher price. The aggregate demand curve, however, is defined in terms of the price level. A change in the price level implies that many prices are changing, including the wages paid to workers. As wages change, so do incomes. Consequently, it is not possible to assume that prices and incomes remain constant in the construction of the aggregate demand curve. Hence, one cannot explain the downward slope of the aggregate demand curve using the same reasoning given for the downward-sloping individual product demand curves. Reasons for a downward-sloping aggregate demand curve. Three reasons cause the aggregate demand curve to be downward sloping. The first is the wealth effect. The aggregate demand curve is drawn under the assumption that the government holds the supply of money constant. One can think of the supply of money as representing the economy's wealth at any moment in time. As the price level rises, the wealth of the economy, as measured by the supply of money, declines in value because the purchasing power of money falls. As buyers become poorer, they reduce their purchases of all goods and services. On the other hand, as the price level falls, the purchasing power of money rises. Buyers become wealthier and are able to purchase more goods and services than before. The wealth effect, therefore, provides one reason for the inverse relationship between the price level and real GDP that is reflected in the downward-sloping demand curve. A second reason is the interest rate effect. As the price level rises, households and firms require more money to handle their transactions. However, the supply of money is fixed. The increased demand for a fixed supply of money causes the price of money, the interest rate, to rise. As the interest rate rises, spending that is sensitive to rate of

interest will decline. Hence, the interest rate effect provides another reason for the inverse relationship between the price level and the demand for real GDP. The third and final reason is the net exports effect. As the domestic price level rises, foreign-made goods become relatively cheaper so that the demand for imports increases. However, the rise in the domestic price level also means that domestic-made goods are relatively more expensive to foreign buyers so that the demand for exports decreases. When exports decrease and imports increase, net exports (exports imports) decrease. Because net exports are a component of real GDP, the demand for real GDP declines as net exports decline. Changes in aggregate demand. Changes in aggregate demand are represented by shifts of the aggregate demand curve. An illustration of the two ways in which the aggregate demand curve can shift is provided in Figure 2 .

Figure 2 Shifts of the aggregate demand curve

A shift to the right of the aggregate demand curve.from AD1 to AD2, means that at the same price levels the quantity demanded of real GDP has increased. A shift to the left of the aggregate demand curve, from AD1 to AD3, means that at the same price levels the quantity demanded of real GDP has decreased. Changes in aggregate demand are not caused by changes in the price level. Instead, they are caused by changes in the demand for any of the components of real GDP, changes in the demand for consumption goods and services, changes in investment spending, changes in the government's demand for goods and services, or changes in the demand for net exports. Consider several examples. Suppose consumers were to decrease their spending on all goods and services, perhaps as a result of a recession. Then, the aggregate demand curve would shift to the left. Suppose interest rates were to fall so that investors increased their investment spending; the aggregate demand curve would shift to the

right. If government were to cut spending to reduce a budget deficit, the aggregate demand curve would shift to the left. If the incomes of foreigners were to rise, enabling them to demand more domestic-made goods, net exports would increase, and aggregate demand would shift to the right. These are just a few of the many possible ways the aggregate demand curve may shift. None of these explanations, however, has anything to do with changes in the price level..

NABARD was established on the recommendations of Shivaraman Committee, by an act of Parliament on 12 July 1982 to implement the National Bank for Agriculture and Rural Development Act 1981. It replaced the Agricultural Credit Department (ACD) and Rural Planning and Credit Cell (RPCC) of Reserve Bank of India, and Agricultural Refinance and Development Corporation (ARDC). It is one of the premiere agencies to provide credit in rural areas.