The diagram above shows that real GDP has increased from Y1 to Y2 which means that economic growth has increased. As a result, unemployment falls as we are getting closer to the inelastic part of the AS curve, which is much needed as “unemployment has shot up” in this economic crisis. However, inflation has risen from P1 to P2 which means that our exports become less competitive so our trade deficit gets worse. However, the rise in inflation is needed as inflation is falling below the 2% target. The changes in the government’s macroeconomic objectives depends on where we are on the AS curve as shown below.
As the Reserve increases interest rates, it effectively lowers the demand for money. Increasing the interest rates would be in the Reserves best interest when the nation is experiencing rising inflation. This type of monetary policy is called contractionary monetary policy (Hubbart, 869). On the other hand, to increase demand for money the Reserve can decrease the interest rate. Decreasing the interest rate effectively increases consumer and businesses consumption.
Or in other words Inflation occurs when the supply of money far exceeds the supply of goods and services. The functions of money are to serve as a medium of exchange, a unit of account, and a store of value. Inflation mainly affects the ability of money to serve as a store of value, since inflation erodes money's purchasing power, making it less attractive as a store of value. Money also isn't as useful as a unit of account when there's inflation, because stores have to change prices more
When the demand for U.S. dollars increases, the value of the dollar will increase or appreciate (Stone 2008, pp. 685). As a result, U.S. products become more expensive for foriegners causing a reduction in exports and increasing imports. This not only effects the U.S. economy, but also affects the economies in other countries. Monetary policies influence and are influenced by international developments, including exchange rates, and based on these market conditions the U.S. government can make strategic changes to these policies to maintain the country’s economic stability (full employment, stable growth and price stability).
Why do Keynesian economists believe market forces do not automatically adjust for unemployment and inflation? What is their solution for stabilizing economic fluctuations? Why do they believe changes in government spending affect the economy differently than changes in income taxes? Keynes theorized that when unemployment raises the amount of goods that are in demand by countries citizens decreases and as these demands decrease the amount of output by the countries manufactures also decreases. As the demand for one product decreases it can cause a chain reaction lowering the demand for products needed to produce the first product.
Consumer price and producer price in 2009 to 2012 continue to drop and raise the price for consumers was not steady. The direction and magnitude of price change in the Producer Price Index for finished goods anticipates a similar change in the Consumer Price Index for all items. When this assumed relationship is contradicted by the actual movements of the two series. The answer is that conceptual and definitional differences between the PPI and CPI—differences which are consistent with the uses of the two measures—contribute to the differences in their price movements. A primary use of the PPI is to deflate revenue streams in order to measure real growth in output.
This greater demand leads to increases in both output and prices. The degree to which higher demand increases output and prices depend, in turn, on the state of the business cycle. If the economy is in recession, with unused productive capacity and unemployed workers, then increases in demand will lead mostly to more output without changing the price level. If the economy is at full employment, by contrast, a fiscal expansion will have more effect on prices and less impact on total output. According to the MPR, the unemployment rate was projected to continue to decline toward its longer-run normal level over the projection period (Monetary Policy Report,
This does not mean that the government will not invest in educational programs; this just means that the investments from the fiscal policy will be less than compared to infrastructure. Four key elements that were utilized in the simulation and emphasized in the lecture were inflation, recession, unemployment rates, and inflation tax. By inflation we can describe the rapidly increase of prices in the, Erehwon, economy and the decline of salaries, another manner to describe inflation can be the rapidly rise of prices and how incomes have stayed the same, making the consumers purchase less items for the same amount of money or more than before (about.com). Recession can be described as the GDP growth goes negative over a period of two or more consecutive quarters; in addition, current unemployment rates, consumer confidence, and spending levels are all part of the factors taken into consideration when dealing with a recession (recession.org). The factors which contribute to a recession and sometimes a depression are: increase in cost of production, higher costs of energy, and the national debt among many others.
▪ Frictional unemployment ▪ Structural unemployment ▪ Full unemployment ▪ Cyclical unemployment 2. Globalization that allows governments to pursue expansionary policies can be dangerous because it can lead to: ▪ A reduction in the debt ceiling ▪ Goods price inflation ▪ Asset price inflation ▪ Goods price deflation Complete Answers here ECO 372 Final Exam 3. Macroeconomics is: ▪ The
Many economists believe “that a rapid stock of the nation’s money causes inflation” (pg.169). The rate of inflation can affect borrowing power for a new business owner as, “the rate of inflation expected by the borrower and the lender will be influence by various interest rates” (pg. 169). When inflation is high, many lenders interest rate increase to compensate for the impact inflation has on their business and the decrease in purchasing power of money that has to be paid back in the future. Since, the FED set the interest rate in which the banks borrow from, Edgars’ ability to borrow enough money or establish a line of credit to start his business will be affected by inflation, interest rate and financial policies.