The Federal Reserve and Macroeconomic Factors Introduction The Federal Reserve controls the economy of the United States through a variety of tools. They use these tools to shape the monetary policy of the United States in order to promote economic growth and reduce the rate of inflation and the unemployment rate. By adjusting these tools, the Fed is able to control the amount of money in the supply. By controlling the amount of money, the Fed can affect the macro-economic indicators and steer the economy away from runaway inflation or a recession. The Federal Reserve The Federal Reserve uses three main tools in order to control the money supply.
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 Scenario/Simulation Here's the scenario: "Recent global developments have pushed the economy into a slump. Industrial production is sluggish and it has become difficult to stimulate demand. The Real GDP is slipping and though inflation looks to be under control, unemployment seems to be soaring. As the Chairman of the Federal Reserve appointed by the President of Oval Office, an effective control of the money supply has to be done. Tools that Control Money Supply The Federal Reserve use several tools like discount rate, federal funds rate, required reserve ratio and open market operations to control the money supply.
We can look at this and picture the government’s desire to a keep a low and stable rate of inflation. The reason for this is because there are a numerous of negative impacts associated with the high levels of inflation, such as, the loss of purchasing power just to name the big one. But what happens when there is a deflation? Monetary Policy and the concepts of Inflation and deflation play a huge role in our economy along with the enduring changes that take place with the Aggregate Supply and Demand. First I would like to discuss the Monetary Policy and how it applies to inflation and deflation.
It also incorporates the idea of the inconsistent trinity, (sovereign monetary policy, fixed exchange rate and free capital flow) where only two of these can be possible at any given time. The impact of globalization on the effectiveness of monetary policy is now at the center of international macroeconomics literature with the recent experience of inflation accelerating the large number of industrial and emerging market countries (Özatay & Özmen, 2008). They support the idea tha... ... middle of paper ... ...lely on their domestic economy (The Economist, 2005). Even though this may suggest that globalization has been able to combat the nature of inflation mistakes by central banks could allow it to break out again. (The Economist, 2005).
From a bank perspective a letter of credit is a contingent liability until it is presented for payment. On presentation the bank will facility payment from the importer accounts. In the event that there is a shortfall the bank will pay the exporter and reclaim the funds from the importer. The ICC report shows that the conversio... ... middle of paper ... ... at the expense of the global trade. As the world economies try to continue their growth since the financial crash the implementation of Basel III impact on their recovery.
The international economy broke up into trading blocks determined by political allegiances and currencies.” Britain’s economy suffered with the loss of the over seas market and the country’s choice to not to devalue the pound. When face with falling exports earnings governments began overreacting and began severely reducing trade. Nearly all countries needed to protect their domestic production and began imposing tariffs. By doing this it greatly reduced the amount of international trade and furthered them into debt. The high tariffs hindered the payments of war debts, which were only paid off by loans from the United States and Britain for war reparations.
Nevertheless, the escalated impact of the crisis did affect the real economy of developing countries especially on the export-orientated nations. As the demand of goods and services has been weakening from the developed countries, the output of manufacturing or services companies decreas... ... middle of paper ... ...ennsylvania. Retrieved from http://www.bis.org/review/r090522d.pdf Ashworth, J. (2013). Quantitative Easing by the Major Western Central Banks During the Global Financial Crisis.
Eventually, European banks were subjected to the unravelling of harmful financial instruments and to plummeting commodity prices and Western consumer demand for imports (Love & Mattern, 2010). Finally, these factors culminated and credit tightened, consumer demand decreased, and unemployment increased on a global scale (Love & Mattern, 2010). In reaction, large-scale fiscal stimulus was launched around the world and,... ... middle of paper ... ...uture debt obligations are not well anchored”. It is apparent that numerous European countries had high government deficits and debt ratios even before the financial crisis, which in turn restricted the impact of their fiscal actions during. Moreover, when announcing bank rescue operations and fiscal stimulus packages, Afonso, Trabandt and Warmedinger (2010) are of the opinion that a trustworthy commitment to uphold longer-term fiscal sustainability may have restricted the negative market reaction.
The IMF loan and bailout packages are hurting the international economy because they seem to be making the economic crises worse for one by trying to help another. Both organizations, the World Bank and the International Monetary Fund were formed with two goals in mind – to help underdeveloped countries and to eliminate poverty from the world. Though they are different, they have been working together to achieve their goals by helping the international world.