The Money Multiplier indicates the maximum amount of money the banking system generates with each unit of excess reserves. It decreases if people hold more cash (higher Currency Deposit Ratio) or if banks hold more reserves (higher Reserve Deposit Ratio), as both leakages reduce the bank's ability to lend and create money.

The Phillips Curve postulates an inverse relationship: lower unemployment is associated with higher inflation (due to wage pressures and demand), and higher unemployment is associated with lower inflation.

Core Inflation measures the long-term trend in the price level. It excludes items with volatile prices, specifically Food and Fuel , to give a clearer picture of underlying inflation trends.

Velocity is the rate at which money circulates in the economy. A higher velocity implies a more active economy where the same money is used for multiple transactions.

M = Money Supply, V = Velocity of Circulation, P = Price Level, T = Volume of Transactions. The theory states that Money Supply * Velocity = Total Value of Transactions.

M1 = Currency + Demand Deposits + Other Deposits with RBI. Time Deposits (FDs) are not liquid enough for M1 and are included in M3 (Broad Money).

Cost-Push inflation arises from the supply side when production costs increase, forcing firms to raise prices to maintain margins. The others are Demand-Pull factors.

WPI measures inflation at the wholesale level and tracks only goods. CPI measures inflation at the retail level and includes both goods and services (like medical care, education, housing). RBI adopted CPI as the key measure for inflation targeting in 2014.

High Powered Money (H or M0) is the base for money creation. It includes all currency issued by the central bank (held by public and banks) plus the reserves banks keep with the RBI.

Operation Twist involves buying long-term securities (raising their price, lowering yield) and selling short-term securities. This flattens the yield curve and reduces the cost of long-term borrowing for investment.

Stagflation contradicts the standard Phillips Curve trade-off. It involves a stagnant economy (high unemployment) coexisting with rising prices (high inflation), often caused by supply shocks.

The simple Money Multiplier is calculated as 1/r. If r = 10% (or 0.1), then Multiplier = 1 / 0.1 = 10. This means an initial deposit can create 10 times the money supply.

Currently, the RBI maintains a corridor width where the MSF (ceiling) is 25 bps above the Repo Rate. (Note: This spread can change based on RBI policy, but standard practice is a fixed spread).

CPI tracks a fixed basket of consumer goods. GDP Deflator tracks price changes in ALL goods and services produced in the economy (investment goods, government services, exports), making it broader.

If people receive income more frequently (weekly vs monthly), they hold less idle cash and spend money faster, increasing velocity. Saving or hoarding money decreases velocity.

Qualitative tools target specific sectors. By increasing the margin (down payment) required for loans against shares or commodities, RBI selectively restricts credit to those sectors without affecting the whole economy. The others are Quantitative tools.

Money Multiplier (m) is inversely related to the Currency Deposit Ratio (c) and Reserve Deposit Ratio (r). Formula: m = (1+c)/(c+r). If people hold more cash (higher CDR) instead of depositing it in banks, the banks' ability to create credit reduces, lowering the multiplier.

Since the adoption of the Flexible Inflation Targeting framework in 2016 (based on Urjit Patel Committee recommendations), the RBI targets Headline Inflation measured by the CPI-Combined (Rural + Urban).

Increasing CRR means banks must park more funds with RBI, leaving less money available for lending to the public, thereby contracting the money supply.

DA for central government employees is calculated based on the Consumer Price Index for Industrial Workers (CPI-IW), compiled by the Labour Bureau.

During a boom, optimism encourages spending and investment. Money changes hands faster as people buy more goods and services, increasing the velocity of circulation.

Disinflation is a decrease in the rate of inflation (e.g., from 6% to 4%). Prices are still rising, but slower. Deflation is negative inflation (prices falling).

M3 = M1 (Currency + Demand Deposits) + Time Deposits (Fixed/Recurring Deposits) with banks. It is the most common measure of money supply.

M3, or Broad Money, includes Currency with the public, Demand Deposits, and Time Deposits with banks. It is the most comprehensive measure of the money supply that is liquid enough to impact economic activity. The RBI primarily tracks M3 growth to decide on liquidity management and interest rates.

Policy lags are critical in economics. "Recognition Lag" is the time delay between an economic shock (like a sudden drop in demand) and the moment policymakers identify it from the data. This delay can sometimes lead to policy actions being taken too late, potentially destabilizing the economy further.

WPI tracks the price of goods at the wholesale level. The "Manufactured Products" group (including chemicals, metals, textiles, food products) holds the highest weight (approx 64%), followed by Primary Articles (approx 22%) and Fuel & Power (approx 13%). Services are not included in WPI.

The RBI publishes Liquidity Aggregates in addition to Monetary Aggregates. L1 is defined as New Broad Money (NM3) plus All Deposits with the Post Office Savings Banks (excluding National Savings Certificates). It provides a wider measure of liquidity than M3.

By buying long-term bonds, the RBI increases their price and lowers their yield (interest rate), making long-term borrowing cheaper for infrastructure and housing. By selling short-term bonds, it keeps short-term rates steady or higher. This simultaneous action twists the yield curve.

Stagflation involves both high inflation and high unemployment (stagnation). Typical tools to fight inflation (raising rates) slow down the economy, worsening unemployment. Tools to fight unemployment (lowering rates, stimulus) can worsen inflation. This trade-off makes it the hardest condition to manage.

In hyperinflation, money loses value almost hourly. People try to get rid of cash immediately by buying goods, leading to a massive increase in the velocity of circulation, which further fuels inflation.

To ensure transparency and accountability, the RBI Act mandates that the MPC must publish the minutes of the proceedings, including the voting record of each member, on the 14th day after the meeting.

Skewflation is a skewed inflation. For example, food prices might be skyrocketing (high inflation) while prices of electronics or real estate might be stagnant or falling. It indicates sectoral imbalances.

Banks create money by lending out deposits. If people hold cash (leakage), less money enters the banking system as deposits. This reduces the banks' ability to lend and create credit, thereby lowering the value of the Money Multiplier.