The Three Most Important Things I Learned in Economics Class

They are influenced by monetary policy; when demand weakens, the fed lowers interest rates, which in turn stimulates the economy, by allowing the consumer to spend more and the industry to produce thus job retention is good. In contrast, continuous stimulus to increase salary or if demands falls, productivity will decrease, jobs are lost and this will push the economy's inflation higher. The Fed just tries to smooth out the bumps of natural business cycle. Inflation is an economy wide rise in prices which is bad because it makes it hard to tell if a business product price is going up because of higher demand or inflation. Inflation also adds premium to long-term interest rates.

This was a unique tool used in early 2008 which dislocated and strained financial and credit markets, and such amendments in funds rate affected quickly the price of assets and interest rates. Due to illiquidity and dysfunction of spreads, Fed were forced to start lending directly to counterparties which was against the collateral set with an aim of achieving liquidity and upgrade flow of credit in financial markets and economy (Canuto et al, 2012).The Fed also increased the size of its balance sheet in order to avail credit to business and households through lowering costs. Adjusting the balance sheet was achieved through buying securities by the Fed in open markets with a propelling mind that incase interest rates fall to zero there will always be a solution in lowering long term interests. They also lowered mortgage rates to reduce long term borrowing by businesses and households to refinance or purchase

Due to developing countries not being able to make any trades, countries then begin to see a dramatic change in the economy. The article “The Financial and Economic Crisis and Developing Countries” by Bruno Gurtner, explained the main causes of why developing countries are still going through the financial crisis phase. Bruno Gurtner simply states, “the crisis was transmitted primarily by trade and financial flows forcing millions back into poverty” (Gurtner, 2008). However, Gurtner discovered, since the financial crisis has been hitting developing countries hard, it begins to cause a regression in economic growth in those poor countries. Gurtner found that “Marco-economically the crisis manifested…in trade and payment balances, dwindling currency reserves, currency devaluations, increasing rates of inflation, higher indebtedness and soaring public budget deficits” (Gurtner, 2008).

The History According to Arnold (2009, p.803-809), subprime mortgage defaults in the United States was the first problem in this current financial crisis, then bubbled damaging cris... ... middle of paper ... ...tion. Firstly, the Fair Value Accounting is not always accurate in the financial market because the value of assets and liabilities always fluctuated. Sometimes, the asset value is overestimate and underestimates. Secondly, the Fair Value Accounting makes financial institution reduce their ability to face the risk because in this current economic situation the value assets are fluctuated. It is a problem to managers to sell or buy the assets.

The stock market would also suffer badly as investors might feel that investing in the US market was too risky. This would cause the stock markets to fall as investors would take their money to other countries, or invest in gold; which many people have began to do. All this would be economically disastrous and probably usher in another bad recession (Sachs, 1989). The US economy is affected by its national debt which is the unresolved balance of government’s internal and external debts, or what the government owes in the in the form of issued Treasury bills, Notes and Bonds including debts to foreign banks and governments. When the government has a high amount of debt it reduces government spending and budgeting.

Frederic Mishkin makes the point in the text, The Economics of Money Banking, and Financial Markets (2010) that “Banks and other financial institutions are what make financial markets work. Without them, financial markets would not be able to move funds from people who save to people who have productive investment opportunities.” (p.7). The movement of funds between savers and those with productive investment opportunities is the means of creating growth. When people lose confidence in the economy this activity freezes or weakens, consequently, asset prices decline, unemployment rises and companies default as was the case of Lehman Brothers in 2008. The freezing of the flow of money is a financial crisis.

On the other hand, interest will increases as money supply decreases. It is very important to understand that the economy works at market equilibrium. There are several factors affecting money supply; and these contributing factors will be the main focus of this paper. Understanding the basic principle on money supply is imperative to have a good grasp on the macroeconomic impact of money supply on business operations. The Scenario/Simulation Here's the scenario: "Recent global developments have pushed the economy into a slump.

In 1929 when the American economy slid into recession, economists primarily relied on the classical theory of economics that was based on a promise that the economy would self-correct in absence of government interference. However, no correction occurred and hence the recession deepened compelling the economists to revise the theory in order to come up with the one that allowed the government to correct inflation and recession in the economy. The growth of government since the 1930s has been accompanied by steady escalations in its spending. Nowadays, keeping the inflation and unemployment as low as possible are the two most important goals of the government as well as the Fed. Also, at the same time, the government and the Federal Reserve have to ensure that the country’s GDP increases at average of 3%.

The function our pluralistic democracy is the cause of America’s recurring economic problems and contributes to growing income inequality. Inflation/stagflation (inflation with slow economic growth) perpetual trade deficits and perpetual federal budget deficits which contribute to the U.S. national debt are the major recurring economic problems that threaten the prosperity of the nation. These recurring problems are largely the unintended consequences of pluralism, the interaction of many groups in the American political process. (Michael G. Roskin, 2010). A closer look at the recurring economic problems Inflation and stagflation are often part of the “business cycle”, the tendency of economy to alternate between periods of growth and recession (economic decline) over the course of several years (Michael G. Roskin, 2010).

On the other hand, instability causes insecurity, especially if there is the possibility of government being ousted and replaced by another that holds diametrically different political and economic beliefs. Foreign exchange risk: This is a real risk and one must be congnizant of the effect of a revaluation or devaluation of the currency either in the home country or in the country the company deals in devaluation in the home country would make the company’s product more attractive in other country. its would also make imports more expensive and if a company is dependent on import margins can get reduced. On the other hand devaluation in the country to which one export would make the company’s products more expensive and this can adversely impact sales. Inflation: Inflation has an enormous effect in the economy.