Economic paper wk6 assignment - Essay Example

Week 6 Assignment Scenario When the economy is at downturn, the country cannot produce enough goods and services to meet the requirements of the people and hence it is unsustainable. In such scenario, I would apply the reserve requirements to stimulate the economic growth of the country. Reserve requirements are rules imposed by the central government to control the amount of money held by the commercial banks explicitly (Bade & Michael, 2001). Reserve requirements determines the bank’s lending capacity that in turns affects peoples purchasing and investing power.

Increasing the reserve requirements will reduce the amount of money in circulation leading to economic growth. On the other hand lowering the reserve requirements will increase the money in circulation resulting into slow economic growth. The country requires an increase in economic growth to maintain sustainability in production of goods and services. Economic growth also ensures a continued creation of employment opportunities to meet people’s economic needs, lowering the reserve requirement will therefore be preferred (Bade & Michael, 2001).

Through discount rates, the federal government can regulate the amount of available in bank reserves by raising or lowering their borrowing rates. Unlike other credit control measures reserve requirements are able to achieve rapid results in the economy. Scenario 2 Although economic growth is necessary, uncontrolled economic growth is harmful. In this scenario, the country’s economy has grown rapidly following the introduction of cheaper household electronic goods. In such scenario discount rates is an appropriate tool that can be used to control economic growth.

Commercial banks obtain loans from the central bank as their last resort to build on their reserves. Discount rate is the interests charged by the central bank on money lend to commercial bank. Increasing the discount rates reduces the commercial bank’s borrowing capacity and this reduces their reserve. Banks with low reserves will have a low lending ability and this will reduce the amount of money in circulation. Reducing the amount of money in circulation will reduce people’s purchasing power and capacity to produce goods and services (Amos WEB).

This phenomenon will slow down economic growth to the desired levels. The economy needs to slow down in order to reduce inflation, increase investments, and maintain sustainability in the production of essential goods and services. Scenario 3 In this scenario, prices for American commodities in the European markets have increased following an increase in the value of the dollar. The phenomenon has led to slow economic growth and I plan to apply the open market policy to revive the economy. The open market policy affects the economy by increasing or reducing banks reserve thus controlling their lending capacity.

Using the open market policy the central bank will sell government securities to the public. This will cause a reduction in bank reserves causing them to increase their lending rates and this will reduce the amount of money in circulation (Amos WEB). With reduced inflation the prices of commodities in the market will reduces and hence increase the capacity of the economy to offer sustainable goods and services. In this scenario, the economic was experiencing slow growth creating a need to increase economic growth.

Increasing economic growth increases production of goods and services required to improve people’s living standards. Increasing economic growth will also reduce unemployment by creating opportunities and maintain sustainability in production of goods and services. The main reason for applying open money policy in this scenario is the need to reduce inflation within the shortest time possible. References Bade, R. & Michael P. 2001. Foundations of Microeconomics. New York: Addison Wesley RESERVE REQUIREMENTS, AmosWEB Encyclonomic [Accessed: January 17, 2012].