Economic Growth And Growth Essay

More investment by firms because the cost of borrowing increases so profits will decrease. Firms import of raw materials will cost more so importa payments rise which causes aggregate supply to shift to the left. This leads to employment increasing and higher income. This leads to more indirect tax for the government and less savings for households. So overall growth is significantly increased.

Inflation is the increase in overall price level. There are two main type causes of inflation which is demand- pull inflation and also cost- pull inflation. Demand- pull inflation is caused by the persistent rise in aggregate demand. When aggregate demand is higher than the economy`s ability supply, overall price level in the market will rise. Therefore, inflation occurs.

The diagram below shows what is likely to happen. AS shifts outwards and a new macroeconomic equilibrium will be established. The price level has fallen and real national output (in equilibrium) has increased to Y2. Aggregate supply would shift inwards if there is a rise in the unit costs of production in the economy. For example there might be a rise in unit wage costs perhaps caused by higher wages not compensated for by higher labour productivity.

Toshiyuki Kimbara Economics 335 Currency Values and Exchange Rates There are several key factors that causes currency values to change and they are: Gross Domestic Product (GDP), inflation, the balance of payment and trade, public debt, and interest rates. The GDP measures a country’s economy since it calculates the total market value of all goods and services. When the GDP of a country increases, the national currency will rise up as well. Inflation measures the rate where the general level of prices for goods and services are increasing while the purchasing power is decreasing. Countries with low inflation rates will have a higher currency since there is an increase in purchasing power., but high inflation will decrease the value of the currency.

INFLATION INTRODUCTION:- Inflation is the continued increase in the general level of prices of goods and services. It is measured when we count the annual percentage of prices when they increase. The prices of dollar does not remain constant when there is inflation. Inflation occur due to the unevenness between demand and supply of money, changes in production and increase in Texas of products. When inflation (means the increase in prices of goods and services) increase the value of currency decreases.

The Federal Discount Rate is an interest rate, so lowering it is essentially lowering interest rates. If the Federal Bank instead decides to lower reserve requirements, this will cause Banks to have an increase in the amount of money they can invest. This causes the price of investments such as bonds to rise, so interest rates must fall. No matter what tool the Fed uses to expand the money s... ... middle of paper ... ...lly and fewer domestic goods sold abroad, the balance of trade falls. As well, higher interest rates cause the cost of financing capital projects to be more, so capital investment will be less.

Explain the short and long term effects resulting from a country’s currency depreciating. A currency depreciation will have both short and long term effects. In the short term, the exchange rate will cause a country’s exports to appear cheaper, thus also increasing the demand for those exports. Likewise, it will also make imports more expensive and reduce the demand. In the long term, the depreciation can lead to increased assumed demand, pushing economic growth.

Let’s say if government decides to lower tax from the income, which is going to increase the income of the people, and give them greater purchasing power. And unless if it’s in a deflation/recession period, people to consume more goods and services, which will shift AD to right. As you see graph 1, assuming the country is producing in a full-employment level, the increase in consumption is going to shift AD2 is going to shift right to AD3, and cause inflation as there will be a bigger competition between the consumers to economy’s limited output/AS. And because of high competition, the price is going to rise drastically, P2 to P3, but cause output to rise only small bits, Y2 to Y3, because since it was already in a level of full employment, producers found it hard to hire more workers. As an example, if Korea decides to lower the tax, then Koreans are going to spend their income on consuming gold immediately instead of saving it.

This has meant that the value of the pound has increased. However this is like a cobweb with many downsides such as a rise in inflation as exports are a component of aggregate demand. In the long run, those countries with higher than average inflation see their exchange rate fall. When inflation is high, a country becomes less competitive in international markets causing a fall in exports (a demand for a currency) and a rise in imports (a supply of currency overseas). A fall in the exchange rate may be needed to restore a country's competitiveness in overseas markets.

In the first case, a rise in aggregate demand could lead to inflation. This kind of inflation is referred to as demand-pull inflation. An initial increase in the level of aggregate demand could be caused, for example, by a rise in government spending. This would cause the aggregate demand schedule to shift to the right, and the short-run equilibrium point would move upwards and to the right along the short-run aggregate supply curve. This would lead to a rise in prices as well as an expansion in GDP.