The two issues that have shaken up the decennary is the 2001 US recession and the current inflationary crisis that is go oning in India. These state of affairss have been explained below by urging appropriate financial and pecuniary policy to be undertaken for undertaking such state of affairs and the consequence of such policy on goods and money market has been explained through IS-LM theoretical account.

Current Indian Economy ( Economic Crisis )

The current Indian Economy is traveling through a really unsmooth stage and moreover due to to the debut of the policies like MGNREGA and immense substructure developmental undertakings undertaken the financial shortage in India has increased to a really important extent. Right now RBI chief concern is to command the rising prices that has arose due to the high disbursement on rising prices and besides cut downing the financial shortage. The current twelvemonth, excessively, saw a negative sentiments predominating in the economic system due to, what has been called as policy palsy. The reluctance on the portion of the authorities from taking tough policy steps which may better the prevailing sentiments and the attendant economic conditions prolonged the bing conditions. FICCI has termed the bing status as economic crisis with increased financial shortage due to increased subsidies and defense mechanism disbursement, high rising prices, reduced GDP growing rate and decreased industrial production.


The undermentioned policy can be followed to undertake the given state of affairs: –

Fiscal Policy

The authorities is confronting the quandary of pull offing the financial shortage along with doing contributing environment for increasing industrial production. The policies so formulated must guarantee that rising prices must stay in control. Furthermore the rising prices that has risen is because of the cost oush factors instead than the demand full factors. For havinf invested enormously on expansionary policy by the authorities excessively much money has come into circulation into the populace. This has led to the rise of rising prices. For cut downing the shortage, the authorities should travel for contractionary financial policy that will affect either increasing authorities gross by agencies of increasing revenue enhancement rates or cut downing authorities outgo by cutting on subsidies. Increasing gross by agencies of increasing revenue enhancement rate will ensue in decreased ingestion outgo taking to less demand for goods and will hold further downward impact on industrial production. Alternatively we can cut on subsidies which are non-productive. The consequence of this policy on Indian Economy utilizing IS-LM theoretical account is explained in Exhibit1.

Monetary Policy

The challenge that India presently confronting right now is equilibrating the growing and besides commanding the rising prices. Right now RBI ‘s primary point of concern is commanding the rising prices. So RBI is chiefly lodging to non cut downing the CRR and SLR rates presently so as to guarantee that the rising prices is controlled. RBI expects to convey the rising prices under control by this twelvemonth terminal. Harmonizing to Rangarajan commission study submitted to the authorities of India holding an rising prices of 6 % is healthy for India. So India can travel for the expansionary program subsequently but to command the rising prices it has to lodge to the Contractionary financial policy. Subsequently with the purpose of holding increased GDP growing and to increase the assurance in economic system, the cardinal bank can travel for expansionary pecuniary policy which can be done by either purchasing bonds in the unfastened market operations or through cut downing CRR/SLR. The moderation of CRR/SLR seems to be a better option at this point of clip, therefore, liberating the locked money for some productive usage. The consequence of this policy on Indian Economy utilizing IS-LM theoretical account is explained in Exhibit 1.

US Recession – 2001

US economic system faces a recession for a period of eight months from March to November’2001. This period was characterized by high unemployment rate which rose to 5.8 % from the bing 3.9 % . Besides, GDP growing rate was slowed to 0.8 % . As a consequence, there was reduced consumer and industry assurance in economic system ensuing in lower disbursement ( causes the IS curve to switch towards left ) and falling of stock monetary values. This is explained in Exhibit:1


Fiscal Policy

The chief motivation in this type of environment is to better consumer and industry assurance with the purpose of increased disbursement. The financial policy at this point of clip must be expansionary in nature. This involves cutting revenue enhancement rates and increasing authorities disbursement in the signifier of bailout and in substructure. Huge disbursement in Infrastructure stimulates demand for other goods which are dependent on substructure like Cement, Steel etc. This in bend supports exciting other goods. The employees who are working in all these sectors besides earn gross. As a consequence the buying capacity of the individual additions and so the disbursement capacity of the person besides increases. Even the companies increase their investings on other goods or upgrading their engineering to run into the new demand. This is a rhythm which increases the ingestion and investing within the state.

Monetary Policy

The motivation is to increase money supply i.e. , traveling for expansionary pecuniary policy. This will ensue in decreased involvement rates and therefore, more existent money supply in the economic system. With the lessening in the involvement rates it is easier for the common individual to really take money from the Bankss. With the lowering of the tools like CRR, SLR, the money that can be lent by the Bankss to the people increase thereby the money supply and besides speed of money supply additions in the economic system. So the investing and the ingestion increases in the economic system.


Any financial policy alteration shifts the IS Curve, and any pecuniary policy alteration shifts the LM Curve.

a ) Shift of the IS Curve due to alterations in financial policy

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The IS Curve displacements to the right to I ‘S ‘ due to expansionary financial policy. Expansionary financial policy may be adopted through

I ) Cut in revenue enhancements

two ) Increase in authorities outgo

These are fundamentally called existent perturbations in the economic system.

H becomes the new equilibrium place. When authorities spends more, there is an addition in income due to the operation of the multiplier. So the income additions to Yc from Ye. If national income additions, the demand for money besides increases. This leads to an addition in the rate of involvement, which now goes up to rc.

A cut or autumn in revenue enhancements lead to an addition in the disposable income ( Yd ) . Similarly this besides leads to an addition in the rate of involvement. Yd = Y – Tax.

The opposite thing will go on if the national income falls. The demand for money will fall. This would take to a autumn in the rate of involvement.

So the alteration in IS curve upward or downward depends on the sort of policy that the authorities is following. Is it expansionary or contractory.

B ) Shift of the LM Curve due to alterations in pecuniary policy

hypertext transfer protocol: // % 2BLM % 2BCurve.JPG

An addition in money supply or acceptance of an expansionary pecuniary policy leads to a autumn in the monetary value of money, viz. the rate of involvement. This is fundamentally called a pecuniary perturbation in the economic system. Rate of Interest falls from rhenium to rd. This shifts the LM Curve downward to L ‘M ‘ . E ‘ becomes the new equilibrium place. Due to a autumn in the rate of involvement, investing additions in the trade good market. Change in investing will increase the national income because ?Y = m ( ?I ) . National Income increases from Ye to Yd.

Therefore, an addition in money supply leads to

a ) Fall in the demand for money

B ) Fall in the rate of involvement

degree Celsius ) Rise in investing

vitamin D ) Rise in the degree of income

Similarly, a lessening in money supply leads to

a ) Rise in the demand for money

B ) Rise in the rate of involvement

degree Celsius ) Fall in investing

vitamin D ) Fall in the degree of income

Any alteration in ingestion map, investing map, authorities outgo or revenue enhancements Shifts the IS Curve. Upward or downward displacement depends upon whether the consequence is expansionary or contractionary.

Any alteration in the demand for money, supply of money ( or monetary value degree ) Shifts the LM Curve. Again, upward or downward displacement depends upon whether the consequence is expansionary or contractionary.

degree Celsius ) There will be a figure of possibilities if both the curves displacement, due to coincident alterations in pecuniary policy and financial policy.

hypertext transfer protocol: // % 2BIS_LM % 2BCurves.JPG

If the IS Curve displacements to the right and the LM Curve to the left, the rate of involvement additions from Ro to r1, but income remains unchanged at Yo.

If both the curves displacement to the right, the rate of involvement remains unchanged at Ro, but the degree of income additions from Yo to Y1.

Assorted combinations of expansionary and contractionary pecuniary and financial policies may be adopted by the authorities to convey about the coveted alteration in the economic system.