Bank Theory

Theories of Interest 1. Classical Theory of Rate of Interest The classical theory states that the rate of interest is determined by the interaction of savings and investment in the capital market. It assumes full employment and treats interest as the price for capital. Mathematical Example: If savings function is S = 50 + 0.2Y and investment function is I = 200 - 5r, Where Y is income and r is interest rate, At equilibrium: S = I Let’s assume Y = 1000: S = 50 + 0.2(1000) = 250 250 = 200 - 5r → 5r = 200 - 250 = -50 → r = -10% (not realistic, so model assumes flexible Y) 2. Keynes’ Liquidity Preference Theory Keynes proposed that the interest rate is determined by the supply and demand for money. People demand money for transactions, precautionary, and speculative motives. Interest is the reward for parting with liquidity. Example: If total money demand is Md = L1 + L2 = kY - hr Assume: k = 0.25, h = 100, Y = 2000 Md = 0.25 × 2000 - ...

Economic Planning in India: A Complete Overview What is Economic Planning? Economic Planning refers to the strategic allocation of a country’s resources to achieve defined goals like growth, equity, and modernization. In India, it involved the government creating five-year plans to guide investments and policy decisions across key sectors. History of Economic Planning in India Started in 1951 with the First Five-Year Plan . Led by the Planning Commission , focusing initially on agriculture and public sector enterprises. Shifted towards liberalization and market reforms in the 1990s. In 2015 , the Planning Commission was replaced by NITI Aayog , emphasizing a bottom-up and cooperative planning approach with states. Objectives of Economic Planning Economic Growth – Boost national income and productivity. Poverty Eradication – Provide employment and improve living standards. Self-Reliance – Reduce dependence on foreign goods and ai...