no4.a.

Demand Pull and Cost Push inflation with examples

Demand-pull inflation happens when aggregate demand (AD) increases in an economy and intersects
the short run aggregate supply curve (SRAS) to the right of where SRAS and long run aggregate
supply (LRAS) cross. This causes some inflation to occur in the short run, and even more in the long
run as the economy adjusts (and the labor market moves back to equilibrium). Demand-pull inflation
can occur for an reason that causes AD to increase but the most common are expansionary
fiscal and monetary policy, and positive expectations about the future (increased growth/income
expectations).

Cost-push inflation happens when SRAS shifts to the left (decreases) and intersects the AD curve to
the left of where AD and LRAS cross. This will cause inflation in the short run, but prices will drop
back down again in the long run as the labor market adjusts back to equilibrium (with wages
dropping). Note that some classes ignore the long run, and only care about where AD and AS cross
and in this case cost-push inflation is a permanent shift in the AS curve causing some amount of
inflation. A common question considers whether inflation caused by an increase in wages (such as
increasing the minimum wage) is caused by demand-pull inflation or cost-push inflation. In fact, it is
caused by both. An increase in wages is an increase in the cost of inputs which shifts the AS curve to
the left (a decrease). An increase in wages also translates to an increase in income which means
consumers can spend more making GDP larger and shifting AD to the right (an increase).
These two effects happening at the same time mean that the price level must rise, but that the new
equilibrium point is uncertain, depending on whether ADs increase or ASs decrease was greater in
magnitude. There are many ways to consider this, The increase in costs is equal to the increase in
income to the shifts must be the same and equilibrium GDP will be the same only at a higher price
level. Assume that some of the income is saved or paid in taxes so the AD shift will be smaller than
the AS shift. Finally, you can assume that the multiplier effects from the increase in consumption
spending (and investment from savings and government spending from taxes) is large so that the AD
shift will be larger than the AS shift. The third scenario probably the most likely, but we do not know
for sure unless we have some equations or data to base it on. So the real answer here is that
inflation caused by an increase in wages is a double whammy of both demand-pull and cost-push
inflation, we cannot blame it on one source.
4.or.b. Fiscal federalism
Fiscal federalism,financial relations between units of governments in a federal government system.
Fiscal federalism is part of broader public finance discipline. The term was introduced by the
German-born American economist Richard Musgrave in 1959. Fiscal federalism deals with the
division of governmental functions and financial relations among levels of government.
The theory of fiscal federalism assumes that a federal system of government can be efficient and
effective at solving problems governments face today, such as just distribution of income, efficient
and effective allocation of resources, and economic stability. Economic stability and just distribution
of income can be done by federal government because of its flexibility in dealing with these
problems. Because states and localities are not equal in their income, federal government
intervention is needed. Allocation of resources can be done effectively by states and local
governments. Musgrave argued that the federal or central government should be responsible for the
economic stabilization and income redistribution but the allocation of resources should be the
responsibility of state and local governments.
The following are benefits of fiscal decentralization: regional and local differences can be taken into
account; lower planning and administrative costs; competition among local governments favours
organizational and political innovations; and more efficient politics as citizens have more influence.
There are several disadvantages of fiscal federalism as well: the lack of accountability of state and
local governments to constituents; the lack of availability of qualified staff; the possibility for people
to choose where to reside; a certain degree of independence of the local governments from the
national government; and unavailability of infrastructure of public expenditure at the local level.
Fiscal federalism is affected by the relationship between levels of government and thus by the
historical events that shape this relationship. For instance, in the early years of American federalism,
geographic separation, slow communication, and clear division of labour made it possible for each
level of government to function without significant interactions with other levels. Several
developments resulted in more interactions and central planning among the levels of government:
improvement in transportation and communication technologies; the New Deal of the 1930s; the
World Wars and the Cold War; and the war against poverty from the 1960s. These developments
increased the interactions among levels of government and helped the development of national
policy making and state and local policy implementation. It also changed traditional
intergovernmental relations. National fiscal policies and financial decisions have been the
predominant vehicle forming intergovernmental relations. Fiscal federalism operates through the
various federal taxes, grants, and transfers that occur in addition to states and localities. The federal
government regulates, subsidizes, taxes, provides goods and services, and redistributes income. In
federal systems like that of the United States, fiscal policies have also sought to empower the states
through deregulation.

3.Various functions of the RBI are as follows:

1. Issue of Bank Notes:
The Reserve Bank of India has the sole right to issue currency notes except one rupee notes which
are issued by the Ministry of Finance. Currency notes issued by the Reserve Bank are declared
unlimited legal tender throughout the country.
This concentration of notes issue function with the Reserve Bank has a number of advantages: (i) it
brings uniformity in notes issue; (ii) it makes possible effective state supervision; (iii) it is easier to
control and regulate credit in accordance with the requirements in the economy; and (iv) it keeps
faith of the public in the paper currency.
2. Banker to Government:
As banker to the government the Reserve Bank manages the banking needs of the government. It
has to-maintain and operate the governments deposit accounts. It collects receipts of funds and
makes payments on behalf of the government. It represents the Government of India as the member
of the IMF and the World Bank.
3. Custodian of Cash Reserves of Commercial Banks:
The commercial banks hold deposits in the Reserve Bank and the latter has the custody of the cash
reserves of the commercial banks.
4. Custodian of Countrys Foreign Currency Reserves:
The Reserve Bank has the custody of the countrys reserves of international currency, and this
enables the Reserve Bank to deal with crisis connected with adverse balance of payments position.
5. Lender of Last Resort:
The commercial banks approach the Reserve Bank in times of emergency to tide over financial
difficulties, and the Reserve bank comes to their rescue though it might charge a higher rate of
interest.
6. Central Clearance and Accounts Settlement:
Since commercial banks have their surplus cash reserves deposited in the Reserve Bank, it is easier to
deal with each other and settle the claim of each on the other through book keeping entries in the
books of the Reserve Bank. The clearing of accounts has now become an essential function of the
Reserve Bank.
7. Controller of Credit:
Since credit money forms the most important part of supply of money, and since the supply of
money has important implications for economic stability, the importance of control of credit
becomes obvious. Credit is controlled by the Reserve Bank in accordance with the economic
priorities of the government.