Inflation and Real GDP work cross-purposes. As stated in the simulation, "striking the right balance between the two is very critical". In addition, "compounding this with the effects of domestic policies and international happenings, and macro-economic system will almost become unpredictable". Money-Multiplier is another thing that is unpredictable. This determines whether the base money that the Fed will release should decrease or increase.
Discuss the concepts of internal and external balances and what floating exchange rates can do to a country's economy Review of the subject When referring to the internal balance these are the goals of economics relating to full employment or a case of normal production and low inflation, that is, the prices are stabilized. In the situation of over-employment the prices of materials increase while in the case of under-employment the prices will decrease. When unexpected inflation occurs, the country finds it difficult to plan for the future and there is a case of income redistribution between traders and investors. The external balances relate to equilibrium in the balance of trade. This signifies the balance between the country’s current and capital accounts.
This results in banks lending out their excess reserves which in turn will increase the supply of money. On the other hand, when the Federal Reserve sells securities in the open market to commercial banks or to the public, bank reserves will be reduced and thus the nation’s money supply will decline (McConnell-Brue, 2004, chpt. 15). “The Fed can also manipulate the reserve ratio in order to influence the ability of commercial banks to lend” (McConnell-Brue, 2004, chpt. 15).
Monetary policy is the method by which the government, central bank, or monetary authority controls the supply of money, or trading foreign exchange markets. This policy is usually called either an expansionary policy, or a contractionary policy. An expansionary policy multiplies the total supply of money in the economy, and a contractionary policy diminishes the total supply. Expansionary policy is used to tackle unemployment in an economic decline by lowering interest rates, while contractionary policy has the goal of elevating interest rates to fight inflation. Monetary policy reposes on the relationship between the rates of interest in an economy and the total dispense of money.
In contrary, when central bank tightens monetary policy by raising short-term interest rate, banks will typically increase their interest rates by similar or closely related amount. This will reduce inflation and limit the
Increasing interest rates and selling securities via open market operations is common one. They use expansionary monetary policy to minimize unemployment and avoid the recession. They bring down the interest rates, purchase securities from member banks, and use other ways to raise the liquidity. There are two types of the monetary policy such as: A. Quantitative measures: Are designed to adjust the volume of credit created by the banking system. It is work through affecting the demand and supply of credit.
Basically decides how much demand for the currency in relation of supply will regulate the currency’s market price in repect to another currency. There are loads of ways for the exchange rate between two countries to change according to MacEachern, (2008),” few of the most popular include: interest rate decisions, unemployment rates, inflation reports, gross domestic product numbers and manufacturing information.” Fixed. A few countries can commit oneself to use a fixed exchange rate. The rate is nurtured by the government. To help the rates to be stable as possible, the country holds extensive amounts of currency in reserves.
Additionally, he also claimed that the monetary policy shock temporarily lowers output while increasing unemployment and has a negative effect on consumer price inflation. Besides that, Kearns and Manners (2006) find that monetary policy shock will increases the interest rate has a significant appreciating effect on the exchange rate. Thus, an increase in interest rate may have prevented the exchange rate from falling even further.
A nation uses interest rates for economic growth or to help prevent inflation. When economic growth is needed a nation would lower their interest rates. However, if a country is concerned about inflation, they may choose to raise their interest rates. When interest rates, raised or lowered, will have a negative or positive impact on consumers, and have a positive or negative impact on investors. Much like gross domestic product (GDP) interest rates branch into nominal and real.
Macroeconomic variable such as inflation will affect the stock price due to the fact that inflation announcement often reduce the stock price and decrease the discount rate causing the value of the company to reduce, Monetary policy will also affects the stock market as it act as liquidity indicator and economic activity. Changes of money supply will also influence the stock price as higher money supply is related with higher interest rate. Reduced interest rate will lower borrowing cost for investment and loan, thus increasing the investment in stock market and increase the stock price. Exchange rate is also determined to be a macroeconomic variable that will cause stock market