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.
If anything affects these factors will result in affecting the demand. For example, if inflation is getting too high, interest rates will be increased to stabilize the economic growth in the economy. This is the result of having the economy already close to full capacity which means that a further increase in AD will mainly cause inflation. Demand side policies include monetary policy and Fiscal policy. Monetary policy are actions of central bank, currency board or other regulatory committee that determines the size and rate of growth of the money supply, which in turn affects interest rates.
The goal of the bank is to create a flow of funds so from the many deposits, the bank can lend out to a wide variety of borrowers and this creates the flow of funds, which is crucial in the banking system. In order for the bank to generate a profit they need their money to be put to work through earning interest. Therefore when it comes to the assets of the bank, cash plays a very minimal role because the banks main interest is earning assets so it keeps its money in loans and investments. Loans represent the majority of a bank’s assets. A bank can normally earn a higher interest rate on loans than on securities, roughly 6%-8%.
Inflation is also a very strong indication of economic growth as it represents the growth of the prices of goods and services. The reason inflation is related to economic strength is because the prices of goods and services determine the spending of consumers and all other spending in the country. As discussed earlier, the economy had a
Economic costs of inflation- Inflations economic costs would include damage to competitiveness as high inflation could cause spiralling price multiplier effect; as prices go up workers would demand higher wages so increasing business costs and another round of price rises to maintain business profits- making exports for expensive, thus reducing the demand for them causing a decrease and AD domestically. Additionally this may lead to unemployment as more costs to the firm i.e. menu costs. Change in inflation could also cause uncertainty to consumers/businesses to spend and invest as they don’t know what the future holds, this can decrease confidence in the market and potentially, in the longer term, cause and reduction in AD. Economic costs of deflation- deflation has proved to have several economic costs, the main cost is that it encourages differed expenditure where people’s expectations change and they delay spending in the hope of getting a better deal.
There are two types of Fiscal policy put in place to alter the level of aggregate demand; Expansionary fiscal policy and Contractionary fiscal policy. When an economy is in a recession, expansionary fiscal policy is in order. Typically this type of fiscal policy results in increased government spending and/ or lower taxes. A recession results in a recessionary gap meaning that aggregate demand is at a level lower than it would be in a full employment situation. In order to close this gap, a government will typically increase their spending which will directly increase the aggregate demand curve (since government spending creates demand for goods and services).
THE ROLE OF FEDERAL RESERVE BANK IN THE US PAYMENT SYSTEM Currency and Coin • • • • Responsible for distributing currency and coin to depository institutions, and ensuring that enough currency and coin are in circulation to meet public demand. New currency and coin are shipped to Reserve Banks and branches across the country. When people need additional cash, a depository institution may order more currency and coin from its Reserve Bank or branch. Institutions pay for these orders by drawing down their Federal Reserve account balances. Checks • • Reserve Banks also provide check collection services to depository institutions.
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.
An increasing marginal cost curve will intersect a U-shaped average cost curve at its minimum, after which point the average cost curve begins to slope upward. This is indicative of diseconomies of scale. For further increases in production beyond this minimum, marginal cost is above average costs, so average costs are increasing as quantity increases. As for the short run average cost curve, initially it is worth producing more, as you are making use of the fixed resource(e.g., reezit machine). however, as the law of diminishing return sets in, it is more costly to produce the extra unit of output.In the short term, there is at least one fixed unit of input that cannot be changed, and because of that, the law of diminishing return applies, saying that as you add successive units of labour into a fixed input, the marginal return diminishes over time.
Maybe, decreasing in efficiency will play a great probability. On the other hand, if the sales rise, with the increasing net income, the profit margin will have an obvious increase. The efficiency will go up, too. Among the other drives, we can change some of them to alter the value of the firm. Management can decrease the COGS/Sales ratio in order to increase the effect on cash flow, which will attract more purchases of the stock.