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Macro Economics Flash Cards
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- 1Open Market Operations (OMO)OMO refers to the deliberation buying and selling of government securities by the Central Bank.
- By doing so, the Central Bank can increase or decrease the cash reserves of the banks.
-During inflation, the Central Bank sells the government securities to the commercial banks. This contracts the credit creation power of the commercial banks and inflation is controlled.
- During deflation, the Central Bank purchases government securities from commercial and public banks. This increases the credit creation powers of the commercial banks and deflation is controlled. - 2Central Bank*A bank which is at the apex of the banking structure.
*The main aim of the Central Ban is not to earn profit, but to promote general public welfare. - 3Commercial Bank*A bank which functions as per the rules and regulations set by the Central Bank is called a commercial bank.
*The main aim of the Commercial Bank is to earn profit. - 4Marginal Propensity to Consume-Marginal Propensity to Consume is the ration of change in aggregate consumption to the corresponding change in the aggregate income.
-The Marginal Propensity to Consume is calculated as:
MPC= Delta C/Delta Y;
where, C= Change in aggregate consumption.
Y= Change in aggregate income
-Generally, the MPC falls with an rise in income.