The innermost issue in macroeconomics is whether or not markets automatically bring economic equilibrium. If the free operation of market forces eventually resulted in a full employment level of national revenue with stable prices and economic growth, there would be no need for government to intervene. The actuality is that the government intrudes through their macroeconomic policies to attain policy goal and recover the performance of the economy. The government’s goal in macroeconomics is to stabilize prices. 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. Monetary Policy is the regulation of the money supply and interest rates by a central bank, such as the Federal Reserve Board in the U.S., in order to control inflation and stabilize currency. Monetary policy is one the two ways the government can impact the economy. By impacting the effective cost of money, the Federal Reserve can affect the amount of money that is spent by consumers and businesses (WebFinance, Inc, 2011). Wages and prices will begin to rise at faster rates if monetary policy motivates aggregate demand enough to shove labor and capital markets beyond their long-run capacities. Fact of the matter is that a moneta...
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...roeconomics class is that, per Isaac Newton, “every action has an equal and opposite reaction”. What would happen if the government didn’t interfere when it was necessary? Would everyone lost their homes in the foreclosure boom? Would there be lots more banks closing down without the bailouts and what chain reaction would happen after that path? There are some questions that these people never care to hear and thanks to this class I understand our economy much better.
Works Cited
Hamilton, A. (2001, December 14). Inflation or deflation?. Retrieved from
http://www.zealllc.com/2001/infordef.htm
WebFinance, Inc. (2011). Monetary policy. Retrieved from
http://www.investorwords.com/3097/monetary_policy.html and
http://www.investorwords.com/1487/disinflation.html
Wikipedia. (2011, April 28). Inflation. Retrieved from http://en.wikipedia.org/wiki/Inflation
The laissez- faire policy refers to the lack of government intervention and regulation of the economy, the ideology lies in the belief that the government would not aid nor hinder businesses (“Business of America. Laissez-Faire Capitalism and Government”). Presidents and a vast number of Americans before the 20th century supported the absence of the government in the economy, since it promoted competition and economic growth. For instance, during the late 19th century the U.S economy prospered from the lack of government intervention, resulting in a 400 percent increase in the economy ("Laissez-Faire.”). Although, the laissez-faire policy expands the economy; a lack of government interference and regulation of the economy grants companies with an opportunity to take advantage. Consequently, it enables for companies to control an entire industry and increase prices that hinder the consumer and eliminate
...ts profit. This causes an increase in unemployment. Deflation also affects loans. When deflation occurs, borrowers are paying back loans in dollars that are worth less than expected. So one’s income may decrease, but the size of their loan stays the same, making it more difficult to pay off.
The financial crisis of 2007–2008 is considered by many economists the worst financial crisis since the Great Depression of the 1930s. This crisis resulted in the threat of total collapse of large financial institutions, the bailout of banks by national governments, and downturns in stock markets around the world. The crisis led to a series of events including: the 2008–2012 global recessions and the European sovereign-debt crisis. The reasons of this financial crisis are argued by economists. The performance of the Federal Reserve becomes a focal point in this argument.
Henry David Thoreau supports laissez-faire capitalism, as shown in his opening remark “That government is best which governs least” (Thoreau 1). This is a policy where the government has little or no interference in its people’s economic and political affairs. He believes that this way, he will not have to pay property taxes which fund the Mexican-American War, which Thoreau thinks is pointless. Even so, America without government intervention would be very
...ssical conservatives are scared of it, but they do know that is needed with some restrictions, or as modern liberals would say, “safety nets, lots and lots of safety nets.” Classical liberals love the free market system because of what it can do for the economy and society.
Many programs that were created during The Great Depression are beginning to haunt our governmental institution even today. Programs such as Social Security and the Welfare systems are creating a substantial amount of debt within our country. According to the article titled “Perils of Price Deflations,” “Two decades ago, worrying about deflation was like worrying about a shortage of pigeons in Trafalgar Square. But now that inflation rates are near zero, periodic deflations are much more plausible” (Carlstrom 1). Deflation has many negative effects. Within Charles Calstrom’s article he names three “dangers of deflation” (1). The first is nominal interest rates. These cannot fall below zero percent and therefore, deflations can increase real interest rates. These high rates discourage investment spending and decrease economic activity. The second is that employers are unable to reduce nominal wages so deflations increase the real wage discouraging employment growth. The last is that these effects can lead to large redistributions of wealth” (Carlstrom 1). In an ideal economy supply equals demand in both work and goods, however, especially in times of economic difficulty this ratio becomes very skewed. Thus resulting in high prices of goods. Often the most negative effect is the redistribution of wealth that follows deflation. “Shocks that
In the study of macroeconomics there are several sub factors that affect the economy either favorably or adversely. One dynamic of macroeconomics is monetary policy. Monetary policy consists of deliberate changes in the money supply to influence interest rates and thus the level of spending in the economy. “The goal of a monetary policy is to achieve and maintain price level stability, full employment and economic growth.” (McConnell & Brue, 2004).
The term Monetary policy refers to the method through which a country’s monetary authority, such as the Federal Reserve or the Bank of England control money supply for the aim of promoting economic stability and growth and is primarily achieved by the targeting of various interest rates. Monetary policy may be either contractionary or expansionary whereby a contractionary policy reduces the money supply, reduces the rate at which money is supplied or sets about an increase in interest rates. Expansionary policies on the other hand increase the supply of money or lower the interest rates. Interest rates may also be referred to as tight if their aim is to reduce inflation; neutral, if their aim is neither inflation reduction nor growth stimulation; or, accommodative, if aimed at stimulating growth. Monetary policies have a great impact on the economic stability of a country and if not well formulated, may lead to economic calamities (Reinhart & Rogoff, 2013). The current monetary policy of the United States Federal Reserve while being accommodative and expansionary so as to stimulate growth after the 2008 recession, will lead to an economic pitfall if maintained in its current state. This paper will examine this current policy, its strengths and weaknesses as well as recommendations that will ensure economic stability.
Even before the creation of the Federal Reserve, banks were used by the public just as we use them today. Deposits were made into savings accounts. Loans were taken out to mortgage a home or finance a new business. Banknotes were issued and spent when the public borrowed from the banks. Borrowers spent these banknotes just as paper money is spent today. These bank notes were valued as money since they were backed by the promise that they would be exchanged on demand for either gold or silver.
Difficulties in Formulating Macroeconomic Policy Policy makers try to influence the behaviour of broad economic aggregates in order to improve the performance of the economy. The main macroeconomic objectives of policy are: a high and relatively stable level of employment; a stable general price level; a growing level of real income (economic growth); balance of payments equilibrium, and certain distributional aims. This essay will go through what these difficulties are and examine how these difficulties affect the policy maker when they attempt to formulate macroeconomic policy. It is difficult to provide a single decisive factor for policy evaluation as a change in political and/or economic circumstances may result in declared objectives being changed or reversed. Economists can give advice on the feasibility and desirability of policies designed to attain the ultimate targets, however, the ultimate responsibility lies with the policy maker.
The appropriate role of government in the economy consists of six major functions of interventions in the markets economy. Governments provide the legal and social framework, maintain competition, provide public goods and services, national defense, income and social welfare, correct for externalities, and stabilize the economy. The government also provides polices that help support the functioning of markets and policies to correct situations when the market fails. As well as, guiding the overall pace of economic activity, attempting to maintain steady growth, high levels of employment, and price stability. By applying the fiscal policy which adjusts spending and tax rates or monetary policy which manage the money supply and control the use of credit, it can slow down or speed up the economy's rate of growth in the process, affecting the level of prices and employment to increase or decrease.
Inflation is defined as an increase in the expected price level and has been the signal for an improving economy, but it has also weakened an economy due to the unemployment it usually produces which usually hurts the Middle class the most. A healthy rate of inflation means an expanding economy due to higher tax revenues for the government and higher wages for businesses that are booming due to the high demand of their products. But if inflation surpasses of what is expected than employer will have to reduce wages to meet these new prices. When the Federal Reserve creates inflation most argue that this is robbing people of the money that they have saved because they have to use it due to the rise in prices. Printing
Inflation; ‘a situation in which prices rise in order to keep up with increased production costs… result[ing] [in] the purchasing power of money fall[ing]’ (Collin:101) is quickly becoming a problem for the government of the United Kingdom in these post-recession years. The economic recovery, essential to the wellbeing of the British economy, may be in jeopardy as inflation continues to rise, reducing the purchasing power of the public. This, in turn, reduces demand for goods and services, and could potentially plummet the UK back into recession. This essay discusses the causes of inflation, policy options available to the UK government and the Bank of England (the central bank of the UK responsible for monetary policy), and the effects they may potentially have on the UK recovery.
It is difficult for government to achieve all the macroeconomics objectives at the same time. Conflicts between macroeconomics objectives means a policy irritating aggregate demand may reduce unemployment in the short term but launch a period of higher inflation and exacerbate the current account of the balance of payments which can also dividend into main objectives and additional objectives (N. T. Macdonald,
Inflation is the rate at which the purchasing power of currency is falling, consequently, the general level of prices for goods and services is rising. Central banks endeavor to point of confinement inflation, and maintain a strategic distance from collapse i.e. deflation, with a specific end goal to keep the economy running smoothly.