The fed has to set a lower reserve requirement, which allows banks to loan out more money, which generates more interest, which could lead to periods of inflation and could have worse consequences if the government does not react quickly enough. Inflation would decrease the purchasing power of an individual's money, which would lead to more saving and less spending. (Fried) Less spending would mean less money being injected into the circular flow of our economy and would lead to economic crisis. However, many critics also use this to determine how national debt does not have a huge impact on the economy. A huge national debt has no effect on the money market.
Advantage: * Stabilize currency fluctuation * Reduction in administrative expenses: cost of managing infrastructure to maintain currency is reduced * Domestic financial institutions try improve their quality and efficiency of service as it means financial integration with the United States * No need to invest heavily in efforts to build market confidence in its own monetary policy as pegging creates a stable relationship with a currency whose reputation is already well established and secure. Disadvantages: * Monetary autonomy is lost * External interference in deciding policy structure Question 2: Evaluate the effects of the fiscal policies implemented by Menem and Cavallo in connection with the convertibility plan. Answer: Initially convertibility plan delivered growth of 4.7% between 1991 and 1999. Inflation rates were drop significantly and it restored the confidence of foreign and domestic investors. In the hindsight, investors lent continuously to Argentina.
spending in the economy does not increase), we have some dangerous ramifications. Assuming that negative interest rates is a way of “unlocking” money supply, then the shift from AD to AD’ is clear (up, but not to the right). As such, the ECB runs the risk that its monetary policy no longer being effective, effectively replicating Japan’s “lost decade”. Recommendation The Author believes that negative real interest rates in
With reference to the UK economy, discuss the relative advantages and disadvantages of fixed and floating exchange rates. An exchange rate system is a system, which determines the conditions under which one currency can be exchanged for another. A freely floating exchange rate system is where free market forces determine the value of a currency. In theory, governments through their central banks, are assumed not to intervene in the foreign exchange markets, however, governments in practice find it impossible not to intervene as exchange rates can lead to significant changes in domestic output, unemployment and inflation. In theory, governments need not to intervene, as it is argued that freely floating exchange rates will automatically move to restore equilibrium on the current balance of the balance of payments.
At last, achieve aggregate demand and aggregate supply to be an ideal balance. Monetary policy is divided into two types: expansionary and tightening. Aggressive monetary policy is to stimulate aggregate demand by increasing the speed of the money supply growth. In this policy, it is easier to obtain the credit, and the interest rates will reduce. Therefore, when the aggregate demand compared with the economic production capacity is quite low, expansionary monetary policy should be taken into use appropriately.
More reserves are held in their account at the central bank. With these additional reserves, they can expand credit and create more money. (Bagus 2011) The FED is more passionate than the ECB about cutting interest rates to boost the economy. The ECB main goal is to keep inflation low, while the FED fights a double battle with not only fighting inflation but also unemployment. More things can affect how the ECB reacts when I comes to inflation and mostly targets a broader price index that includes things that doesn’t bother the FEDs as much, such as the Libya-related oil spike in 2011.
Monetary and Fiscal policy What is the difference between fiscal and monetary policy? Monetary policy is typically implemented by the central bank, and refers to actions which influence the availability and cost of money and credit, as a means of helping to promote economic growth and price stability. Tools of monetary policy include open market operations, the discount rate and reserve requirements. Fiscal policy decisions are set by the national government, and include decisions about the amount of money it spends and collects in taxes to achieve full employment and a non-inflationary economy. However, both monetary and fiscal policy may be used to influence the performance of the economy in the short run.
Even though the prices will lower of time, companies will take advantage of the recession, knowing that consumers still require their goods, no matter if it falls outside their budget or not. It is the government and consumer’s responsibility to overcome the “stickiness” of the prices via certain stimulations. Essentially the government will directly, or indirectly, create opportunities for work for its unemployed citizens, therefore increasing consumer incomes to a point where they will match a compromise price level. This, in turn, will cause the demand for goods to go up which will decrease the price temporarily. The economy is not run by a single entity, which means that it is the individual or individuals that are driving our economy.
Therefore two objectives have been met. However, the diagram also shows a conflict. With higher AD there is also demand pull inflation.The extent of any economic growth depends on the elasticity of the AS curve. If there is a small output gap and a more inelastic AS curve then the impact on economic growth will be smaller but there will be more inflation. This is unlikely to be the case in the UK at the moment as low interest rates and a large budget deficit has not cause significant inflation.
The Components for Aggregate Demand are C (consumption)+ I (income)+ G (government spending)+ (X-M) (net exports) and a change in the components of Aggregate demand will cause a shift of the curve. Fiscal policy is a type of economical intervention where the government injects its policies into an economy in order to either expand the economy’s growth or to contract it. By changing the levels of spending and taxation, a government can directly or indirectly affect the aggregate demand. Fiscal policy can be used in order to either stimulate a sluggish economy or to slow down an economy that is growing at a rate that is getting out of control. There are two types of Fiscal policy put in place to alter the level of aggregate demand; Expansionary fiscal policy and Contractionary fiscal policy.