Inflation and Interest rates, Macroeconomics Video Lecture | Macro Economics - B Com

today we can understand in economic
analysis for forex trading and can be
applied in equally and as well as
commodity so we'll start with the very
important concept of inflation and
interest rates so these are the tools
which actually steers your economic now
so let's understand the interest rate
and the inflation and also let's first
understand inflation what is inflation
basically this is let's suppose you and
luckily you got married so you are not
couple and you have a family income of
thousand dollars and we've got this you
get a kit so you have a kid now and kids
asked you for dollar hundred as pocket
expense a monthly pocket expense so you
pay its well good you have enough sweet
family now so after some times you know
you're doing great
so you could grow up a little bit and
very soon he you know start drinking
beer let's say at the age of five he got
bless nobody does that
then just give you is that example so
consider it so you think that the the
the kid is now spoiled I we cannot
handle so you've planned for another kid
now another kid is also asking $100 for
you know pocket expenses so because the
elder brother was indeed drinking a lot
of beer so he got influenced with him
and so went to the beer shop and now
both together enjoy the beer now the
parents were like little bit Aston eyes
then little bit worried so they plan for
another kid
now another kid is also asking for a
pocket expense of hundred dollars and
obviously when two kids are spoiling the
family the third will also get export
smogged see what exceptions are there so
he is also drinking beer now what
happens is the demand of beer will
increase if too much of population is
increasing basically so when the demand
is increased so the price of the beer
will be rised by the bar no be a bar
owner so basically this is called a
demand pull inflation okay so there's
too many people coming into the same
beer bar they dry the price of the be a
main increase now let's understand
further in the same story see you
already had three kids now he plans for
two more kids we cannot help out in good
old days people used to do this thing
they didn't have to do anything else
it's killing so let's say the family guy
was having trouble and you know
maintaining the family household
expenditures on a month-to-month basis
because his income was only thousand
dollar so what he did is he asked for a
hike in salary due to increasing family
expenditure now so the second option he
could have looked for a loan from bank
to beer the expenditures now so loan was
not a solution because you have to repay
and you don't save your expenditures are
more than your savings your income so
first option was not good for the family
to take the the husband and wife so they
asked for the TD
company so the company had two options
to rise the price of Labour's because
the the population was increasing the
demand was increasing the inflation was
increasing so the factory owner gave him
two options
those two option for factory owners
before he could increase the salary one
is that the increase the sales so that
means tell all the employees to generate
more sales see if we have more sales we
have more revenues we will increase the
salary second option was rise the price
of product so when you rise the price of
product you are doing because of the
cost pull inflation so that is called
because of the wages increased safe you
rise the price of the product because
you have to increase the salary so you
have to you know think increase the
price of the products that will in and
gives the inflation so that does
basically cause pole inflation now then
we have another option which was in PSD
cells so if this guy the the husband and
wife both are working with the company
this company says to increase the sales
these people have to go to the new
customers because already the the old
market was already saturated topped so
there were new guys new children's new
kids they were growing so they were new
customers so they have to attract new
customer they have to sell their
products to new customers in that
situation new customer will only become
a buyer when they will get a job okay so
they don't have job they cannot you know
and become buyers
now so they have to go through the
factory to get the job
now factory can only give new jobs when
they have more syllables and more cells
is only possible and the family
expenditures are more or they have good
income or maybe there are new customers
in the market a new customers want new
job
since becomes a VC a circle now second
option could be bank can give loan to
the new customers or the new generation
to become an Tiffany o start new
business something like that so both the
option could be there for new jobs no or
the factory owner can ask bank that give
us some money
on loan and I think there is a new breed
not breed I would other said there's new
generation coming up looking for jobs
and there's a lot of possibility for new
customers new markets so let's have you
know let's give me give us some loan we
scale up the business will expand the
production and it will increase the
production and sort of expand the
factory and you can get more jobs now so
Bank says that we can only give you loan
when we have some savings with us so we
don't have money why because the people
in the system the economy spending more
because they have more kids
the main culprit is population so they
are more kids so they're spending more
or government is asking for more taxes
so they are having no savings if there
is no saving and we don't have money so
the bank cannot give loan to the factory
so the bank is also helpless now more
happy
in the system s then the Fed Reserve
maybe or the government prints the money
a government explaining the expenditures
and basically if the Fed gives money
it gives money to the bank on loan okay
you can say at the reported reported is
the interest rate at which the by
central bank lends money to the bank now
so the government is creating money in
the system by giving easy loan or cheap
loan to the banks and then the bank
normally gives loan to the new onerous
new generation or the existing factories
of the business so that they can you
know increase the business and the
economy keeps on you know goes on a
rotation let's say or the economic
vidole as you know the movie so the
economy's GDP is growing so this we
running actually which is printed by the
center man goes to public and I said the
factory and at all so the back now so in
this situation if too much of money is
printed by the central bank then what
will happen they will lead to more
inflation you know so the money printing
is easy by the bank they can print it
and they can print it through the thin
air so that is that falls in the open
market operations one of the
responsibilities of the central banks so
if there's too much of money supply then
ah they could be difficulty so that will
lead to high inflation now if you take a
recent example of like Jim Bobby what
happened there that was hyperinflation a
lot of money was printed by the
government you know system why because
the system was not generating revenue at
all business high expenditure
I envisioned certainly mismanaging of
economy that PA to disaster so printing
money is not the solution only but yes
the immediate remedy could be to have
more supply of money into the system so
that we have a steady increase of
inflation but our economy will also grow
now
so moving on further let's understand
how interest rate impacts the inflation
so let's suppose there are three people
who wants to save so they deposit the
money with the bank and the bank pays
interest on their deposits no so another
source of money for the bank is to take
loan from the Fed Reserve so there's a
cartoon of Ben Bernanke the F the Fed
the governor basically in other states
so what is up so Bank has two options to
take money to have you know deep
function then to take loan from the Fed
Reserve or the central bank of an
economy oh and the deposits from public
and be interest to the public and when
they take loan from the Fed Reserve they
pay interest to the Fed is a-- and as
well as if they take deposits from the
public debate interest to the public now
so there are people also in the economy
we need loan so to them the bank pays
the loan so the issues the alone now and
when they should alone from the the bank
receives interest okay on those loans
from the you know
those guys who have taken the loan so in
that situation normally the interest
rate on loans in issued by the bank is
higher than the deposit the interest
rate on the deposits so that's the dis
difference in the interest rate of
deposit and the loan is the profit of
the back basically or the operating
profit of the back now sometimes it
happens that the interest rate is raised
by the central bank the depo rate at
which the central bank gives the loan to
the commercial max so in that situation
the cost of the money okay it's
increased the price for the money is
increased so in that situation the cost
is high so band is forced to increase
the interest rate into the fourth on the
loans so the interest rate is normally
high so when the interest rate is
increased you know many commercial you
know banks follow that if the interest
rate is increased by the Fed Reserve so
what happens in that situation no loan
demand decreases so that loose Jew you
know higher interest rates leads do you
know little sure economy because there
is less expenditure GDP normally reduces
so and you know normally real estate
sector banking sector automobile sector
these are hit badly and it's bad for the
economy also because high interest rate
or higher cost of capital will lead to
higher prices of goods and your
companies and economy are not
competitive in the international you
know treat so the interest issue below
however so if interest rate is increased
the
loan demand decreases so higher interest
rate will reduce the loan dyma so if
they have less money to spend so the it
widow improved the inflation rate into
the system so there will be less money
into the system that will less
expenditure less expenditure means less
demand less demand means the producer of
the good has to reduce the price so that
will curb the inflation so so higher
interest rate becomes the inflation in
the economy so how higher interest rates
increase the value of your currency now
so what happens is let's say if you have
higher interest rate there will be more
people depositing money you know and if
there will be more deposits with the
bank and higher cost of you know loan
they will be lesser spending you know
they've been less loans less spending
and also people are saving mode because
they are you know motivated to save more
so they will spend you know more so so
they will spend less will save more so
due to this the producers will be forced
to reduce the cost of goods now so if
the cost of goods is reduced it will
slow down the economy the economic
growth will be less high an interest
rate will reduce the economic growth so
that the politicians are suffering and
reduce the inflation rate reduce the
inflation rate now but that will rise in
FDI and as well as export so if you have
higher interest rate in
economy the foreign direct investors
yeah they are attracted in your economy
there is high interest rate there will
be high you know returns on their
investments so they start looking
towards our economy yeah there other
conditions also like on safety you know
stable the political stability many
other things the business environment
and all but yes higher interest rate
will increase or attract FBI as well as
if the entire you know industry reduces
the price so they get benefited in
another term because there is a rise in
export you become you know price
competitive in the my in the
international market and you start
exploring another destinations so that
increases the export now both brings you
know dollar into your economy or you
know the currency demand increases on
our you know your currency value Rises
so there's a more supply of dollar into
economy okay or the INR is demanded more
both of ease so your currency value
increases so normally if you have higher
interest rate or increasing interest
rate that wouldn't be Steve out there I
near term you have you seen notice that
that the recently we were on a fixed the
the cash deposit rates were nine percent
in India eight point seven fine now it
is reduced to same person sometime so
the currency is also depreciating it's
going from which is 60 to 63 to 68 67
kind of thing and he actually is
reducing badly I can tell you one thing
if code would not have been down okie
troll is trading at a very low price
it's three four years low I guess it's
badly it's five six years ago I guess so
if you would not not have been at a low
price
we would have had really bad time
aya could have had a low of as low of 72
74 maybe sir crude oil price reduced
collars buys a cheap crude oil has saved
us a lot because a lot of dollar goes
out to an importing crude oil anyway so
the higher interest rate will help you
but yes you cannot keep interest at high
for a longer time because the economy
suffers gdb suffers but yes you in
pieces your currency value so you can
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