In his book on general theory of employment interest and money, John Maynard Keynes, mentioned that effective demand can be raised by increasing the rate of investment with the help of deficit financing. Deficit financing occurs when Government expenditure exceeds Government revenue. Deficit financing takes place when the Government obtains the cash balances of past fiscal years, or borrows from the Central Bank leaving Government security as on insurance or ever when the Government prints more money, thus expenditure is met over receipts.

Generally deficit financing takes place during the period of depression or for the purpose of economic growth. We shall discuss them separately.

We know that unemployment can take place in developed countries due to the deficiency of the effective demand. Through the role of Government to stimulate private consumption and investment to overcome depression, it can lower the tax rates whilst maintaining level of expenditure in public as well as private sector. Thus, here the Government actually spends more than it can collect taxes, deficit financing takes place. If this method does not work, the Government may then increase its expenditure above taxes, it is also deficit financing. As a result of increase in Government Investment, income and employment also rises due to the multiplier. Thus, during a depression period deficit financing can be administered to expand income output and employment without adversely causing inflation. In a depression phase it is better to finance the Government expenditure through deficit financing rather than taxation as the latter has an adverse effect on the private consumption and investments and thus effective demand will be hampered with.

Generally unlike developed countries whose problem of unemployment is due to effective demand, LDCs problem attribute to deficiency of capital. The only possible method of increasing the growth rate is by increasing investment, but how? Being LDCs foreign aid is almost out of the question. One method may be to increase domestic saving which can only be obtained through savings of the people. However, since the people in general are already living at subsistence level, difference between consumption and income is almost nil making it quite impossible to let alone save! Another attempt by the Government is to increase taxes. Once again due to extreme poverty such a method of financing means creation of new money. Increase in money supply raises the prices of goods and services, supply cannot be increased in the short run, loans are given to the people to increase their purchasing power. The money comes back to the government, reducing money supply and thus decreasing price level of commodities. On the other hand, as a result of rise in prices, entrepreneurs profits go up and they are further induced to investments in the public sector i.e. developmental expenditures e.g. on roads, railways, bridges etc. Thus, deficit financing can develop an underdeveloped country provided there is an efficient body of administration, controlling and allocating the resources accordingly.

There are a few major effects of deficit financing interalia increase in money supply with the public, rise in income level and a rise in the general price level. The main controversy between classical economists and Keynes regarding deficit financing was that it is likely to cause inflation. However, Keynes theory proved that no inflation would take place in the case of a developed country; however, once again, inflation may take place in underdeveloped countries as a result of deficit financing. This is due to the fact that there is a time lag in production of goods; between the moments expenditure is incurred right up until goods are finally produced. Shorter the time lag, lesser the pressure of inflation and if people were to just save the newly created money, there will be no inflation. Inflationary pressure as a result of deficit financing can be reduced by the following policies:

Government should promote exports and local goods, give subsidies to entrepreneurs etc. and demote import of foreign goods through heavy duty.

Resources should be properly allocated by the Government, no extravagance should occur, supply of commodities and prices should be controlled through fiscal policy.

Inflation can be controlled through fiscal policy and through monetary policy. The government is in a position to avoid extravagance.

Public debt is the amount of money that is obtained by a Government through internal and external sources for the purpose of developing a country. There are two main kinds of public debts.

1. Productive and Unproductive Debts:
   Productive debts are those which are used in turn to create assets which will yield a substantial amount of income in order to pay for the interest and loans productive debts are, for example, used on irrigation projects, roads, and railways etc. Productive debts are also known as (i) Active debt which is spent on projects which will yield money income and increase the purchasing power of the community, and is also known as (ii) Reproductive debt which is also used to create assets which yield income to pay the loans and interest.

Unproductive debts are those debts which are used on projects which will not really benefit the Government financially but are rather merely for public interest e.g. public parks, museums, libraries etc. Unproductive debts also apply to periods of war. Unproductive debt is also known as (i) Passive debt or (ii) Deadweight debt.

1. Short Term and Long Term Debts:
   This kind of debt is in line with internal debt. Short term loans are obtained by the sale of treasury bills and also by ways and means of advances from the Central Bank., Their main function is to bridge the gap temporarily between the current revenue and current expenditure, i.e. if Government expenditure exceeds Government revenue, short term loans are obtained. However, this is generally practiced in developed countries only because LDCs usually maintain a higher level of expenditure than their revenue. Short term are also obtained when interest rates are high and Government needs money to finance projects and thus raises tax until the interest rates fall. Short term loans are also known as floating debt. Long term loans are obtained for major projects i.e. productive projects e.g. railways, roads etc. Such loans are also needed for defense purposes and during the war period itself. Rates of interest on long term loans are higher than short term loans and therefore commercial banks and industries are induced to invest their surplus funds to gain greater profits.

Public debts are taken to fulfil the following requirements.

1. Inflationary Situation: As a result of inflation prices of goods and services go up. In order to bring them down again, Government issues public loans to the people to reduce their purchasing power. Consequently the money will come back to Government and with a reduction in money supply prices of goods and services will go down once again.




2. Financing Public Works: Particularly during the phase of depression the Government would have to increase its expenditure on investment and thus create employment for the people, loans will be needed to start the ball rolling.




3. Economic Development: This is mainly the case with third countries. Their Government is trying in vain to achieve a desirable level of everything in the country and thus huge expenditure have to be incurred for this purpose. Loans are greatly needed.




4. Defence Purposes: Whether a country is at war or not, the Government still has to maintain a fairly high level of expenditure on their defence. Although these are unproductive measures but they still have got to be considered to a great extent.

These debts once matured are paid by these methods some of which are desirable than the others.

1. Utilization of Surplus Revenue: Generally speaking this method is not really in use now for the following reasons. (i) Government tries to avoid surplus budget as it reflects a bad image on the government of a country. (ii) A surplus budget is rarely substantial to pay off debts.




2. Purchasing Government Bonds: The Government itself may resort to purchasing its own stock in the market which is done through a surplus budget or obtaining loans at the low rates.




3. Terminable Annuities: This is mainly for repayment of permanent debt. It is done by agreeing to pay the creditors a certain fixed amount annually. These installments/payments are called annuities.




4. Conversion: This method is rather more to be the side of reducing the burden debt by converting a high interest rate loan to a low interest loan. It actually is not a method of repayment. Assuming that a Government obtains a high interest rate loan and with the passage of time finds that the money market is easy to obtain credit, the Government will then convert the high interest rate debt into a low interest rate debt by collaborating with the creditor to accept the reduction in rate of interest. Supposing that the creditors do not agree, the Government then provides a new loan at the low interest rate and pays the debt of high interest rate.




5. Sinking Fund: Generally this is the main and latest method of repayment of debt secured by Governments throughout the world. A fund will be set aside for which a certain amount of money out of the government is issued each year. After a certain period the sum total is calculated and is used to pay the interest and loan.

A forest researcher once mentioned the dialogue between trees and the atmosphere. What does this mean? The word “dialogue” refers to interactions between living organisms and nonliving matter, the gases in the atmosphere. In a broad sense, such interactions are a fundamental property of ecosystems, the highest of several structural levels into which life is organized. An ecosystem (for example, a Cascade Mountain rain forest), as well as all the nonliving, physical components of the environment that affect the organisms, such as air, soil, and sunlight. The ecosystem and the structural levels below it form a hierarchy, with each level building on the ones below it. Below the ecosystem level, all the organisms in a rain forest are collectively called a community. Below the community, a group of interbreeding individuals of one species, a group of flying squirrels in our example, is called a population. Below population in the hierarchy is the organism, an individual living thing. (The flying squirrel, our organism, is gliding, its skin pulled flat between its outstretched legs.)

Below the organism level, life’s hierarchy unfolds within the individual organism. The flying squirrel’s body consists of several organ systems, such as a circulatory system, an excretory system, and a nervous system, shown here. Each organ system consists of organs. For instance, the main organs of the nervous system are the brain, the spinal cord, and the nerves, which transmit messages between the spinal cord and other parts of the body.

As we continue downward through the hierarchy, each organ is made up of several different tissues, each of which consists of a group of similar cells. A cell is unit of living matter separated from its environment by a boundary called a membrane. Each tissue has a specific function, which is performed by the cells that compose it. The nervous tissue that makes up most of the brain, for example, consists of nerve cells. The nervous tissue in the squirrel’s brain has millions of microscopic nerve cells organized into a communication network of spectacular complexity. The nerve cells transmit signals that coordinate the squirrel’s body parts, such as the muscles that stretch out its legs during a glide.

Finally, we reach the molecular level in the hierarchy. We show as our example DNA (deoxyribonucleic acid). DNA molecules provide the blueprints for constructing the organism’s other important molecules and transmit this information, as genes, from parents to offspring. A molecule is a cluster of atoms, the smallest particles of ordinary matter. In the computer graphic which illustrates only segment of one DNA molecule, each of the spheres represents an atom. The overall three-dimensional shape of a DNA molecule is a very long double helix, two chains coiled around each other.

Life’s hierarchy builds from molecules to ecosystems. It takes many molecules to make a cell, many cells to make a tissue, several kinds of tissues to make an organ, and so on. Most biologists specialize in the study of life at a particular level. For instance, a researcher analyzing the body postures of a gliding squirrel focuses on the organism level. However, the same researcher often works at a higher or lower level as well. For example, under standing gliding posture may require studying, at the organ-system level, the interaction between muscles and bones. Indeed, the deepest biological insights often come from discovering new connections between the different levels in life’s hierarchy. The full spectrum of the hierarchy, from molecules to ecosystems, encompasses the scope of biology. With this in mind, let’s see how biological scientists go about their work. Although we focus on examples of outdoor research in forest ecosystems, the same underlying scientific approach is used in all types of biological research.

If you access the internet, the key words “canopy crane” will lead you to World Wide Web pages showing giant construction cranes poised over green treescapes. Most of the pages tell about scientists using the cranes to study life in the treetops, or canopies, of forests. These are some of Earth’s least explored environments.

Virtually unstudied until about twenty five years ago, forest canopies are one of nature’s great showplaces of different kinds (species) of living organisms. Biologists estimate that fully half of the 5 million to 50 million species that exist on Earth may spend all or much of their in forest treetops. The canopies of tropical rain forests, areas near the equator where yearly rainfall often exceeds 200 centimeters (80 inches), harbor the greatest number of species. Equally wet forests in the coastal regions of western Canada and the northwestern United States also are home to remarkable numbers.

The big crane called the Wind River Canopy Crane Research Facility stands in an evergreen rain forest in the Cascade Mountains of southern Washington State. The crane’s vertical tower is about 80 meters high, as tall as a 25- story building. The crane’s horizontal boom rotates around the tower, looming over 6 acres of forest that have never been logged or otherwise significantly altered by human activity. The dominant trees have are 60 meter-high firs and hemlocks that have been growing for about 500 years. Over the centuries, a great variety of organisms have colonized the canopy environment.

To use the Wind River crane, a researcher climbs a ladder in the vertical tower and steps into the yellow gondola. An operator then rotates the crane to the desired position, and a trolley under the horizontal boom runs the gondola out over the treetops. Forests researchers and Wind River project director Dr. Jerry Franklin expresses his enthusiasm for having direct access to the canopy this way: “Trees are one of Earth’s main points of contact with the air. This is our chance to learn about the dialogue between trees and the atmosphere.”

The crane’s gondola can also be lowered into the treetops, and descending quietly among the big trees, you really begin seeing, hearing, and smelling the canopy’s varied life. Brown and greenish fungi, lichens, and thick earthy mats of moss cling to the larger branches. Collectively called epiphytes (Greek for “on plants”), these organisms often take hundreds of years to fully colonize a tree. Hidden in moist soil that builds up in the moss mats are thousands of small animals- frogs, salamanders, beetles, spiders, mites, and many others. Some are found nowhere else.

A quiet summer evening is often the best time to experience a canopy’s rich array of animal life. Looking up from the Wind River gondola, your eye might catch the split-second shadow of a flying squirrel across a bright moon. Common in Northern American forests, but rarely seen because they are active only at night, these foot-long rodents speed-glide between the big trees. Insects are especially abundant in the canopy twilight, and bats flit about, often eating close to their own body weight in insects in a single night. Owls, another group of nocturnal hunters, are silent on the wing, but each species has its own distinctive hoot.

The enormous variety of living organisms in forest canopies and the new science of canopy research set the stage for this chapter’s introduction to biology, the scientific study of life.

The Meteorological Theory was presented by economists W.S. Jevons and H.L. Moore. “Trade cycle takes place due to the factors originating from outside the economic system”, say these two economists, “and that it directly influences the internal / economic factors”. Such factors are e.g. a change in the weather i.e. cyclones, rainfall, drought etc.

In keeping with this theory another economist i.e. Prof. A.C. Pigou added “Harvest variations occupy a significant place among the impulses behind industrial fluctuations; good harvest tending to promote expansions and bad harvests result in contractions of industrial activity.”

W.S. Jevons says that, “Sunspots appear on the sun due to which the weather becomes very bad, harvest are adversely affected, industrial expansion is retarded and the economy contracts. Whereas in the absence of the sun-spots the weather becomes good and harvests are better and industrial expansion brings expansion in the economy.”

According to H.L. Moore, “Planet Venus comes in between the sun and the earth after every light years due to which the flow of electrons from the sun is retarded and the weather is adversely affected which results in the harvests and industrial expansion becoming bad, and hence it leads to depression; but after that weather becomes normal and the whole situation is better once again.”

Economic fluctuations that occur have been totally ignored in this theory. Such fluctuations take place through real economic factors and not external factors. Nobody can say that depression in the economy will take place exactly every light years. Such an assumption is inadequate because it cannot be justified by facts; but merely predicted. This theory is confined to agricultural countries whereas the industrial countries also experience trade cycle upon which the meteorological theory does not apply.

The items of expenditure which the government initiates after accumulating the necessary revenue are termed as government expenditure. These expenditures may be in the form of development expenditure or even non-development expenditure.

Defence and Internal Security
Expenditure on defense for a country is usually determined by surrounding circumstances. For countries in the war-zone Government expenditure on defense would be quite high. Internal security or police and other uniform services are a must in every country, for it is in their hands to ensure that peace and law and order are maintained. Thus expenditure on recruitment of personal, uniforms, equipments etc. is provided by the Government.

Civil Administration and the Courts
Civil servants and other Government staff salaries are paid by the Government. In other words, we could also say that the people generally pay the salaries of Government servants. The courts, on the other, particularly the judiciary are also paid a handsome allowance. This is to safeguard the judiciary and maintain its impartiality so that no bribery may take place. However, in certain countries like England the judiciary is paid out of a special fund to avoid scrutiny in parliament.

Education and Social Welfare
The Government sets up schools and higher mediums of education with the revenue obtained partly and allocate a certain part of its budget for that purpose as well. Likewise health centers, orphanage homes etc. are set up by the Government in the interest of the people in general. Doctors, nurses and other staff are thus paid by the Government as well.

Communication/Transport and Irrigation Projects
Roads, railways, ships and airplanes are provided by the Government for purpose of communication and transportation. Likewise irrigation projects such as dams, hydroelectric generators etc. are built for the benefit of the community.

Foreign Relations and Foreign Loans
For diplomatic purposes a Government would have to build or at least provide money for the payment or rent on an embassy in the host country. Similarly the government has to pay back its debt i.e. loans obtained from foreign bodies.

This trade theory was presented by the economist W. H. Beveridge. He says… “The common element is found in the simple and well – high universal fact of industrial competition.” Prof. Pigou adds, “What we have to deal with are the waves of pessimism and optimism generated by the nature of human beings and the conditions of modern business life.”

According to this theory the entrepreneurs are so sensitive that they generate cyclical situation simply by their own feelings of optimism or on other hand, pessimism. Whenever the entrepreneurs feel that future business prospects will be bright they would take full advantage of the situation. For example, when entrepreneurs feel that prices will shift upwards in the near future, they will take steps to ensure that their profits are equally increased. Thus, with this optimism in mind, they increase their investment and output level. Hence, income and employment level goes up and the economy expands.

However, this exposition is not well-founded and hence entrepreneurs, being so sensitive quickly lose confidence and feel that prices will generally fall in due time which will leave to them recurring losses. With this feeling of pessimism working around entrepreneur’s wind-up that investment, and income and employment level falls. Hence, prices also fall due to the fall of demand for the goods and services. Losses will take place. Hence, the wave of pessimism generates depression.

In reality it is the economic factors take place first, and only then do entrepreneurs have a tendency towards optimism or pessimism. Therefore, psychologist factors are of secondary importance whereas factors play the key role in the theory of trade cycle. The economic factors are e.g. the price change and changes in employment and investment level etc. This theory has failed throughout the regular recurrence of all the factors phases of a trade cycle.

J.R. Hicks, Harrod and Hansen sought to explain the cyclical fluctuations through the interaction of the multiplier and the accelerator. According to Hicks, cyclical fluctuations are a problem of a dynamic economy. He formed his opinion on the following assumptions:

1) Consumption is a function of income C = f(Y) and Induced investment is a function of output. 2) Role of autonomous investment increases at a constant rate in the long run. 3) There is a limit to the expansion of an economy while there is no specific limit to a phase of contraction, and that the values of the multiplier and accelerator are the same respectively.

Based on these assumptions Hicks says that a dynamic economy moves on a dynamic equilibrium path.

Autonomous investment increases the investment level in the country and consequently consumption increases due to the operation of the multiplier. In order to produce consumer goods to meet the additional demand for consumption induced investment increases due to which the accelerator comes into operation. Hence, the National Income increases.

As a result of the consumption expenditure going up again the National Income increases due to the interaction of multiplier and accelerator. Thus, the economy expands and reaches the full employment level. However, such a level cannot be maintained for long because the induced investment will only increase so long as the output increases, but as we already know that at full employment level it is not possible to increase the output level. Inadequately investment leads to a fall in the income and output level, thus, the economy starts facing a recession.

The income and output level tends to fall even further due to the reverse operation of the multiplier which occurs during contraction phase and that induced investment may be zero, furthermore, the acceleration process becomes very low. This latter phenomenon is useful for an economy in a depression period as it enables the economy to attain an equilibrium position. Thus, the economy does not collapse totally.

Since autonomous investment increases at a constant rate, the multiplier comes into operation and increases the National Income to a multiple extent; and as a result consumption expenditure increases and induced investment and accelerator, National Income increases and the economy revive.

This theory brings focus real economic factors to show business fluctuations but ignores the role of the monetary factors particularly the role of bank credit in cyclical fluctuations. It emphasizes on investment but neglects the concept of MEC which is a major determinant of investment. The value of the multiplier is assumed to remain constant in the theory, but this is not so. It does not change as MPC changes with the passage of time. The concepts of the multiplier and the accelerator have many limitations in the process of their application in real life. It is quite unrealistic to assume that autonomous investment remains the same over a long period of time.

Instability of the economy is bad for the growth of a country. As a result of this, entrepreneurs are faced with uncertainly and therefore, lose confidence to make any investment. Hence income and employment of a country go down. The policy makers are unable to put into effect their economic policies. Thus, it is necessary to control instability for growth and development of the country.

Generally speaking a capitalist economy grows through fluctuations. If we take certain measures to control the wild fluctuations of the economy and bring them under control or, in other words, if we allow only mild fluctuations to take place, that will be the economic stabilization in a country.

Stabilization does not mean the freezing of an economy so as to brush away all fluctuations. This tendency would be highly dangerous. Mild fluctuations have got to be allowed so that the growth rate of economy can be maintained. The most appropriate level to stabilize the economy is usually the full employment level.

Prof. Lee has defined economic stabilization as "economic stabilization exits when fluctuations in the economy do not carry resource utilization beyond a range of 94%- 97% of full employment and prices are held at comparatively stable level.”

Monetary policy is adopted by the central bank of country in order to control and regulate the money supply in the country so as to stabilize the economy. The main function of monetary authority is to control and regulate credit money. Bank credit forms the largest part of total money supply in order to control the money supply. It uses the following methods to control credit money in a country during the different phases of a cycle.

All commercial banks by law are required to deposit some part of their time liabilities i.e. current account deposits in the central bank. During the boom phases of a cycle the central bank raises the reserve ratio of the commercial bank and hence allows less amount of cash at the commercial banks disposal and these banks are therefore forced to reduce their credit facilities i.e. loans to the people and thus the expansion phase is controlled. However, during a depression phase the reserve ratio is reduced and the commercial banks get more cash to operate their business. Thus these banks are all to increase their loans facilities which then induce entrepreneurs to make investment. This turns the phase of depression towards a revival.

Bank rate is rate at which commercial banks get loans from the central bank. During the phase of an expansion the central bank raise the rate. This phenomenon would discourage the commercial bank from obtaining loan, which in turn would mean that the commercial banks, loan to entrepreneurs would decrease. Hence, the expansion phase is controlled. However, during the depression period the central bank reduces the bank rate. This encourages banks to obtain cheaper loans and thus commercial banks are in turn able to advance cheaper loans to entrepreneurs. Hence, depression is checked and controlled.

Open-Market operation means the open purchases and sale of government securities. During the phase of expansion, the central banks sell securities i.e. government securities to the people in general in the open market at low prices. In order to avail of this golden opportunity, the people make their payments to the central bank by withdrawing their money from the commercial banks. Thus, cash in the commercial banks is reduced greatly and they are forced to ask the people for the repayment of loans. Hence, the money supply is reduced and expansion is controlled.

During the phase of depression the central bank purchases government securities at higher rates and allows the flow of cash in to the hand of the people in general; upon which they deposit their money in commercial banks. Thus, the liquidity position of the commercial banks becomes batter and they are able to offer loans to entrepreneurs for investment. Hence, the money supply increases and depression is controlled.

The margin requirement of commercial banks is the difference in percentage between the difference in percentage between the value of the collateral and the value of the loan given to a client. Such loans are generally obtained against securities.

During the expansion period the central bank raises the margin requirement of the commercial banks due to which, during this particular period, less money is given to the people in the form of loans. As a result the investment level falls and hence the economic boom is checked. Conversely, during the period, of contraction, the margin requirement of commercial banks is lowered down and thus more loans are advanced, investment is encouraged and the contraction of the economy is overcome.

Consumer credit is that form of credit which is obtained by the buyers from the sellers through the purchase of durable consumer goods on installments. During the phase of expansion strict credit regulations are enforced in order to limit the consumer credit whereas during the contraction phase of an economy credit facilities as such are more easily allowed to stabilize the economy. Under this method to stabilization, the commercial banks are sent circular from the central bank, which directs the former to limit their credit facilities during the expansion period; and sometimes even goes as far as giving the commercial banks a stern warning against excessive loans during the boom period. The situation is vice versa in case of a contraction in the economy.

Credit rationing is used by the central bank for commercial banks, when the bank rate policy fails. There is a quota for each bank by which the central bank fixes the amount of credit money for them. Note that this method of control is only applied during the expansion phases as during the phase of contraction in the economy, credit is given generously so that investment may be generated to bring back economic stability. Publicity lets the central bank get hold of the media for the purpose of publishing the annual balance sheets of different commercial banks so that these are making known to the public in order to promote greater awareness of any possible forthcoming liquidation of any commercial bank. In other words, if the balance sheets are low, this would lead people to take out savings for investment in other commercial ventures.

Direct Action would be the last measure that the central bank would resort to as this is a rather arbitrary manner of controlling the credit money. By this method, the central bank simply refuses to give any loan to commercial banks, during the expansion period.