nedded of money market

why is such a market needed? there are several reason. first for most individuals and institutes, inflow and outflows of cash are rarely in perfect Harmony with each other for example, governments collects taxes from the public only at certain time of the year,when personal and corporate income tax payments are due. disbursements of cash must be made through out the year, however, to cover the wages and salaries of government employees, office supplies,repairs and fuel costs, as well as unexpected expenses. when taxes are collected, governments usually are flush with funds that far exceeds their immediate cash needs. at these times, they frequently enter the money market as lenders and purchase treasury bills, bank deposits and other attractive financial assets.later, however, as cash run law relative to current expenditures, these same governmental units must once again enter the money market as borrowers of funds, issuing short -term notes attractive to money market investors.
there are several reasons to money market needed. they are as following.
1. it plays the vital role on the mobilizing the saving the money market accumulation the scattered the scattered resources and mobilizes them.
2. the government implement the policy of deficit budget to mobilize the international resources optimum. in such a situation, the government complements the deficit budget through the money market.
3. the development of the money market plays vital role for the successful implementation of the monetary policy.
4. the capital market has a vital role for the economic development of the developing countries . the capital market does not develop unit the money market develops.
5. although there is sufficient possibility of the investment in the developing countries . they have to be deprived of the opportunity of investment due to the lack of capital in the required quantity. when the money market is developed well in the capital found is formed and it provides the opportunity of investment.

Leakages of multiplier

The incomes of people are influenced by various factors limiting the process of multiplier. That is, due to leakages in income flow the effect of multiplier is reduced. If the marginal propensity to consume is 50% than 50% of increased income is taken as the leakages and only 50% is used in consumption expenditure. Due to the leakages the national income does not increase fully. So, leakages in various forms are the leakages of multiplier. Main leakages of multiplier are as follows:

1. Saving

Saving is one of the most important leakages of the multiplier because whole part of the increment in income is not used in consumption since marginal propensity to consume is less than unity in other words, some parts of the income is saved and this will remain separate from the income flow that will occur later on. Therefore, the higher, the marginal propensity to save in the economy, the smaller is the size of the multiplier. Similarly, the lower the marginal propensity to save, the larger is the size of the multiplier.

2. Debt cancellation

If part of the increased income is used to pay back the loan, then that part of the income won’t have any kind of effect on consumption and this will check the process of the multiplier. As a result, the size of the multiplier will be small.

3. Net imports

If part of the increased income is used on the consumption of foreign goods, then this won’t have any kind of effect on the consumption of the national production. That is, the expenditure on imported goods is the loss to the country. This will decrease the value of the multiplier.

4. Inflation

If due to increased investment the inflation increases then most part of the increased income will be used to pay for the increased price. This will affect the multiplier. That is, increase in the price of the consumption goods of the consumer’s means the expenditure on those goods will increase. Increase in the price of goods decreases the real consumption of the people. Thus, inflation is also one of the main leakages of multiplier.

5. Purchase of old stock and securities

If some part of the increased income is used in the purchase of old stock and securities in addition to consumption goods, then cumulative effect of income will be less than before. As people start purchasing old stock and securities, the consumption expenditure decreases and the size of the multiplier will be small.

importance or uses of multiplier

Concept of multiplier is important form the theoretical as well as practical point of view. For this reason, the importance of multiplier in business and economic sector. The importance of the multiplier can be explained as follows:
1. Importance in investment
Multiplier theory has taken investment as the important factor of the economy. The proportionate increase in the level of income and employment in the economy depends up on the multiplier. This clarifies that increase in income and employment is on the basis of increase in investment.
2. Analysis of trade cycle
It is easier to analyses trade cycle on the basis of multiplier. Multiplier helps in estimating the increase in income as a result of increase in investment. So, multiplier will be of great importance in formulating progressive policies to bring the effects in the economy to right speed.
3. Formulation of economic policy
The main objective of every economic policy is to create the situation of full employment in the economic. Therefore policy makers will formulate their country’s economic policy using the multiplier. This will help in creating the situation of full employment.
4. Public investment
Public investment is of great importance specially in the situation of depression and unemployment, because this does not stress much on profits. Multiplier indicates the importance of public investment in increasing the level of employment.
5. Equality between saving and investment
The equality between saving and investment can be brought about with the help of multiplier. Increase in investment increases the income. Increase in income will bring about equality in saving and investment.


Concept of multiplier is important form the theoretical as well as practical point of view. For this reason, the importance of multiplier in business and economic sector. The importance of the multiplier can be explained as follows:
1. Importance in investment
Multiplier theory has taken investment as the important factor of the economy. The proportionate increase in the level of income and employment in the economy depends up on the multiplier. This clarifies that increase in income and employment is on the basis of increase in investment.
2. Analysis of trade cycle
It is easier to analyses trade cycle on the basis of multiplier. Multiplier helps in estimating the increase in income as a result of increase in investment. So, multiplier will be of great importance in formulating progressive policies to bring the effects in the economy to right speed.
3. Formulation of economic policy
The main objective of every economic policy is to create the situation of full employment in the economic. Therefore policy makers will formulate their country’s economic policy using the multiplier. This will help in creating the situation of full employment.
4. Public investment
Public investment is of great importance specially in the situation of depression and unemployment, because this does not stress much on profits. Multiplier indicates the importance of public investment in increasing the level of employment.
5. Equality between saving and investment
The equality between saving and investment can be brought about with the help of multiplier. Increase in investment increases the income. Increase in income will bring about equality in saving and investment.

Determinants of saving

Every individual will want to save some part of the income in the view of solving the possible problems that may occur in the future. But remain determinant of saving is the level of income of the consumer. Therefore, the higher the level of income of the people, the higher is the saving possibility. So, part of the income left over after the consumption expenditure of people is known as saving. Factors determining saving can be explained as follows:

1. Level of income

The saving of every individual depends upon the level of income. The higher the level of income, the higher is the saving. This is because the marginal propensity to consume of rich people with high income will be low while the marginal propensity to consume of poor people with low income will be high. For this reason, the developing countries with low level of income will have lower marginal propensity to save.

2. Precaution

If people take precautions to tackle the economic problems that may arise in the future, then the current saving will increase. In such a situation, the propensity to consume will decrease.

3. Foresightedness

Some people save for their old-age, for their children’s health and education, for the security of their family etc. this will increase in the saving.

4. Liquid assets

Among various determinants of saving, liquid asset is also a main one. The more the people desire to keep liquid assets, the less will be the saving. This is because liquid assets get spent on various unexpected activities. Just opposite to this, saving will be high if liquid asset with people is less.

5. Fiscal policy

Fiscal policy undertaken by the government also determines the saving. If the government increases the tax rate, then propensity to save will decrease. But contrary to this, if tax rate is decreased, then the propensity to save of the people will increase.

6. Price level

The price level of the goods in the market also influences the saving. The higher the market price, the less will be the saving of the consumers resulting the decrease in the national saving. But if the market price level is low, the consumers can get goods cheaper and increase the saving. So, the price level of the goods also determines the saving.

Assumptions of consumption function

Law of consumption is based on the following assumptions:
1. Short – period
This law is related to the short run because in the run distribution of income, price-level, population growth, fashion, tastes and behavior, etc. won’t change. Consumption will only depend upon income, so low of consumption function is based on this assumption.
2. Normal situation
There should be a normal situation in the economy for the application of this law. In such a situation, war, revolution or regime change, hyper-inflation, etc. should not occur.
3. Laissez-faire capitalistic economy
Psychological law of consumption is only applicable to the capitalistic economy where there is no interference of any kind from the government. That is law of consumption won’t be applicable if government interference occurs.

Concept of consumption functions

Any individual to fulfill the needs different goods are consumption if income increase, the consumption also increase and if income decrease, the consumption also decrease. There is a close relationship between consumption and income. Consumption depicts the expenditure at different level of income. The more changes in income results in the more changes in the consumption expenditure. Therefore, consumption function gives the schedule of consumption expenditure at various levels of income of the people. Thus, consumption function is also termed as propensity to consume. The table that shows the consumption expenditure schedule at various level of national income is known as consumption schedule. This shows the propensity to consume of the people. For this reason, consumption function is also known as the propensity to consume. Since every individual consume on the basis of the income, the income is independent variable and the consumption is dependent variable. This is because consumption is dependent upon the income. For this reason, consumption increase as income increase and consumption decrease as income decrease. Therefore, consumption is the function of income

Difficulties in the measurement of National income

There are different methods used in computing national income. Whatever method is used in computing national income, some difficulties are found to arise. Thought measuring national income in reality is not impossible, there are surely some difficulties. While computing national income, the countries have to take into considerations things like data available in the country, available resources and factors, distribution of national income , economic activities, behavior and customs of the people ,economic structure, etc therefore, the difficulties that arise while computing the national income can be explained as follows:
1. Problems of double counting
The biggest problem in computing national income is the double counting of goods and services. There are some goods which are taken as final goods at one time and as intermediates goods some other time. For example, sugarcane for a farmer is the final goods. But for sugar mill this will be intermediate goods or row material for the production of sugar. For the sugar mill sugar is the final goods but again this will be taken as intermediate goods in the production of sweets and tea. So, when the same commodity is used as final goods intermediate goods at different times, there is a very high possibility of double counting.
2. Transfer payments
While computing national income there arises a problem of identifying the transfer payments. Transfer payments means the various facilities and subsidies provided by the government to the people of the country. There seems to be a very big problem in whether to include or not to include the facilities provided by the government such as unemployment allowances, old age allowances, widow allowances, pension, interest on public loans, etc. in the national income. These things on one hand are the personal incomes and on the other hand are the government expenditures. If this is included in both, then national income will be more then real national income. Therefore, transfer payments between an individual or institution and government will not be suitable to be included in the national income.
3. Changes in the price level
In any country the price level of various goods and services will be changing from time to time. Due to change in the price level of the goods and services, the value of the currency of the country will also change. If price level increase, then in the situation of constant production or decrease in production may still indicate increase in national income. In country to this, if the price level decrease, the national income seems to decrease despite the increase in the national production. To solve this problem, the current period’s value is expressed in terms of the value of the base year. But still, since real data are not possible to be taken, this will be faulty.
4. Non – monetized sector
While defining national income, pigou gave the concept of taking money as the base of computing national income. But, if national income is computed according to his concept, the real fact of the national Income of the developing countries won’t be reflected. In developing countries such as Nepal, there are still many sectors which are based on barter system. So, in such countries, if national income is measured on the basis of money, then the national income will be less than real data. Similarly, there are many goods and services which can’t be expressed in terms of money values. For example, services provided by police and army for peace and security, the services provided by roads, schools, collages, etc. can be taken. It is difficult to express these services and contributions in terms of money values. As a result, real data won’t be available and difficulties will arise in computation of national income.
5. Difficult to choose the method of national income
There are various methods for the measurement of national income. It is very difficult to choose the method for the computing national income. The most commonly used method in computing national income are production method, income method and expenditure method. the selection of these methods depend upon the availability of the data. So, a suitable method will be chosen according to the availability of the data. But in countries like Nepal, none of these method will be able to given the correct data of national income.
6. Income from illegal activities
Different people can earn from various illegal economic activities. The incomes earned from black – market, smuggling, bribery, gambling, etc. come under income from illegal activities. The incomes earned from such illegal activities are not shown by the people who are indulged in such activities. But these sorts of incomes also have important shares in the national income. Due to exclusion of these incomes, the real data of national income won’t be available.

Disposable personal income

To calculate disposable personal income the direct taxes are subtracted from income. That is, if from personal income, the direct taxes are subtracted, then the disposable personal income will be obtained. This amount is the part of the personal income which will be available to the people of the economy for their expenditure. The difference between the disposable personal income and the personal savings is the personal expenditure. This will also be used in paying the interest on the loan taken by the consumers for the consumption of goods and services.