In the short-run, the relationship between unemployment and inflation is inverse. This means that the change in one will have the opposite effect on the other. So here, a fiscal policy aimed at reducing unemployment will increase the interest rate. For example, if Bartavia decides to lower taxes to increase consumption thru use of consumer’s marginal propensity to consume, and the economy in general thru the multiplier effect, it will increase the aggregate demand for goods and services. Marginal propensity to consume is the idea that that consumers will spend more money if they have more, but increases in income do not lead to equal increases in consumption because people save some of the money.
If the Federal rate goes up, there will be less spending which ... ... middle of paper ... ...ll have some immediate consequences on the economy, but I believe that these will even out in the short term as our country begins to get back on its feet. A budget that reduces spending will enable us to begin to pay back some of our national debt, which will increase the value of our currency in the world markets. This will in turn give more buying power for our dollar, reducing inflation, and increasing the likelihood of more investing. As you can see, everything starts at the top. If the federal government will straighten themselves out, the rest of the country will follow along.
Futhermore, European Central bank helped to recover from recession by reducing interest rate. It is aim to reduced the inflation. As the inflation increased, people will need more money to buy a goods. To avoid this to happen, ECB reduce thr interest rate to keep inflation rate low. The above diagram shows the GDP growth rate of United States of America during the recession.
From nominal and real rates there are also lowered and raised rates. When the interest rate is lowered consumer spending grows while savings decrease. Spending on items such as housing becomes one of the ways the AD rises. Though AD rises it pulls the economy out lack of spending, but puts the economy into the possibility of inflation. Differentiating from low rates, high rates stop inflation but creates the possibility of recession.
The additional income allows people to spend more causing more demand. Businesses may respond to this rising demand by raising prices because they know they cannot produce enough. In order to stop inflation, the central bank uses a restrictive monetary policy. This is where interest rates are raised and the bank sells its holdings of treasures and other bonds. The reduction in the money supply restricts liquidity and slows down economic growth.
The present value of the future cash flows is calculated by discounting the future cash flows at a discount rate. Money supply is significantly related to the discount rate; hence, it will affect the present value of future cash flows. PV=FV... ... middle of paper ... ... money supply) symbolizes a weak economic situation, thus investors will demand to hold more risk premium, which makes the businesses less attractive and lower stock price. The research of Friedman & Schwartz (1963) gives an explanation between money supply and stock returns: an increase in money supply will raise the liquidity of securities for buyers, and thus leads to a higher price of stocks. Hamburger & Kochin (1972) and Kraft (1977) also supported the claim on the relationship between these two variables in their researches; whereas, Cooper (1974), Nozar & Taylor (1988) could not find any connection between them.
The IS/LM model stands for Investment Saving / Liquidity preference. In case where the nominal money supply is increased by the Central bank for any uses that will shift the LM curve to the right, this will cause a lowering of interest rate and a rising of Gross Domestic Product. In case where the Central bank wants to raise interest rate, than it has of course to decrease the money supply and shift the LM curve to the left and this will cause a fall of national income. In other words if the Central banks decides to raise the interest rate, consumers aren’t willing to take any credits that’s why the GDP, in which contains disposable income plus Investment plus government spending, will go down and the whole economy will be effected. To explain the IS curve in a better way, we take the example of the government, if the government decides to spend more on government spending and cut taxes for lower salary earners, than consumers ... ... middle of paper ... ...not in the short-run, that why FED lets the economy to boost when there is inflation in the short term.
A surplus means that the government is borrowing less than it is spending which can reduce the national debt. During this time a surplus may slow the economy to help curb inflation thus keeping the AS/AD curve stable. Conclusion - Andrew It’s easy for one to think of the economy in simple terms of supply and demand. There is much more to economics, however. Fiscal policy’s influence during times of deficit, debt, and surplus has a larger effect on the economy as it can impact nearly every financial aspect in the world.
Demand-side economics is generally known as Keynesianism, named after the English economist John Maynard Keynes. He believed that governments should force interest rates down by printing money and lending it from the central bank at a discount. This would put more money in consumers\\ ' hands and encourage them to spend and consume more, thus creating an incentive for investment. This helped to solve some of the problems, but in the long run it is extremely inflationary, because with the increase of the money supply it becomes devalued. Keynesianism also calls for the government to spend more to try to help the economy grow.
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. The balance of payment includes all financial transactions with in a country and the balance of trade describes the difference between a country’s imports and exports. A surplus in the balance of payment would increase the national currency while a depreciation in the balance of payment would decrease it. Also a positive balance of trade, which means that there are more exports than imports, would increase the currency value because there is an increasing demand in a country’s currency. But a trade deficit would result in a currency depreciation for a country since there is more outflow of monetary payments to other countries.