Question

Please explain banking sector crisis, accumulation of NPAs and its corresponding impact on overall economy, national income & GDP using IS-LM model & ISLM graphs. Please explain what action central bank can take to address this bank NPA crisis to recover economy and explain the impact of those actions using IS-LM model as well.

Answer 1

Banking sector crisis is largely observed as NBFCs had lent loans easily to stressed asset companies where debt was high and ability to repay debt was low and in lieu of high interest rates loan was offered however which could not be repaid by institutional investors. This led to ballooning leverage and non performance assets of banks and NBFCs which caused crisis in terms of liquidity ajd credit availability froze affecting other corporate to spend on capital expenditure. Subsequently the revenues and profits decline and so does unemployment rises due to layoffs. This causes fall in national incomes, lower investment and higher savings and thus consumption also decrease. This leads to lower aggregate demand and thus lower inflation and real GDP to plunge.

Interest Rate IS Lm. m . ВР Yo=Y, 27 output Fixed Exchange Rate, Perfect capital, Expansionary Monetary Policy IS- LM-BP Model buddyproduct Teacher's Signature The price. You are using

Central Bank thus needs to adopt expansionary monetary policy to revive economic growth using buying back government securities, lowering discount rate and CRR aswell as SLR.

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