First, if the government increases its purchases but keeps taxes constant, it increases demand directly. Second, if the government cuts taxes or increases transfer payments, households’ disposable income rises, and they will spend more on consumption. This rise in consumption will in turn raise aggregate demand” (Weil, 2008, para. 4). Consumer income has a huge effect on aggregate supply and demand just as the aggregate supply and demand can affect consumer income.
As situations happen around the world the internal economy is being affected, the price of oil increases and more money in the market should be created, but this will affect the inflation, as more money is in the market, the GDP keep growing and the unemployment is decreasing. To balance the economic growth, lower the inflation, and make a reasonable rate of unemployment it is important to take in consideration that typically if money is released into the system the real Gross Domestic Product will increase, creating opportunities of work and decreasing the unemployment rate. After indentifying the tools used for the Federal Reserve and analyzing the influence this has with the money supply the Feds can add or take money into the system to control the levels of inflation, increase the Gross Domestic Product and reduce the
Economic Critique ECO/372 June 18, 2012 Gaminie Meepagala "What is the current economic state of the United States?" Well, like a crazy roller coaster ride, the United States economy has gone up and down, and twisted all around. As a group of reporters, we have researched many key factors to determine whether the economy is improving or continuing to head downwards. A few economic factors were identified as influencing the state of the economy are, unemployment, expectations, consumer income, and interest rates. These factors have ramifications on the current state of aggregate demand and supply.
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.
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.
Change in the price level B. Increase in aggregate supply C. Increase in aggregate demand D. Decrease in aggregate demand 3. Which combination of fiscal policy actions would most likely be offsetting? A. Increase taxes and government spending B.
How is money created? Money is created by the Federal Reserve Bank (a U.S. “central” bank) at certain times or taken out of the economy at certain times to create a favorable balance that enables economic growth, low inflation, and a reasonable rate of unemployment. The monetary policy is deliberately changed to “influence interest rates and the total level of spending in the economy” (McConnell & Brue, 2004). Spread between the DR (discount rate) and FFR (federal funds rate). If the spread is positive, the banks will “always” borrows from other banks.
(This is why people say the Fed prints money.) The Federal Reserve can restrict credit by raising interest rates and making credit more expensive. This reduces the money supply, which curbs inflation. Why is managing inflation so important? Ongoing inflation is like an insidious cancer that destroys any benefits of
When the interest rates are low, more funds are available; companies expand with the increase in employment. When the interest rates are high, fewer funds are available; companies do not tend to expand with the decrease in employment. So the point is implementing policy by raising or lowering interest rates can affect the demand for goods and services. In conclusion, the main purpose of money is to buy goods and services that are available in the markets. Money has four major functions and medium of exchange is what the nation uses the most in current economy.
Monetary policies influence the productivity of the country and this is how employment is affected. If there is a decrease in interest rates then more people are going to borrow money because the cost is lower. “Lower interest rates also change the willingness of financial institutions to lend money” (Federal Reserve Bank of San Francisco, 2011). With the financial institutions more willing to loan money, more people will borrow money and then there will be a higher demand for goods and services. As the demand for goods and services increase the demand for labor follows