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Economy - Essay Example

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Name Date MACROECONOMICS Answer 1 The bullion report presented the debate on the topic of rules versus discretion in the policies to control the aggregate demand. The bullion report presented discussion on various topics but its main purpose was to present recommendations for an early continuation of convertibility of the banknote of bank of England which was suspended since 1797, so that they can be made redeemable at fix uniformity in terms of gold…
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Download file to see previous pages... Even the full restoration in the standard of gold was not able to restore the monetary policy and financial crisis occurred in every single decade, which was in 1825, 1836, 1847, 1857 and in the year 1866. This disturbance in the financial system was due to the adoption of new rule which was motivated by the idea that monetary disturbance are due to the failure of the fluctuation of mixed currency (gold and paper) at the rate it would have. It was observed that the new rule implemented seemed to be misguiding. It evoked fear that maintaining the gold standards and converting the gold into bank note alone cannot establish monetary stability unless there is a limitation imposed in the creation of notes by the banks (Rules v. Discretion, 2011). Answer 2 Inflation targeting is the policy of the central bank in which the inflation rate is estimated by the bank and then this projected rate is made public by the bank. The actual inflation is then directed towards this targeted one by using the interest rates and other monetary tools. The inflation rate and the interest rate are inversely proportional to one another.Therefore the attempt of the central bank to change the interest rate is transparent because of inflation targeting. Taylor rule on the other hand refers to monetary rules which are followed by some of the central banks, such as the US Federal bank.It forecasts how much the nominal rate must be changed by the central in order to divert from the targeted inflation rate, the actual GDP and also from the potential GDP(HETZEL, 2000). This rule has more attraction than the “Inflation targeting” because it takes into account the deviation from the actual equilibrium level such as from full employment and the inflation rate which has an overall better effect on the economy. The Taylor rule also allows the interest rate to react with the variation in the output gap. Therefore the reaction in the output gap is the reaction in the nominal interest rate. This allows the central bank to observe the output gap for targeting the inflation policies(Inflation Targeting vs Taylor Rule, 2013). Suggestion: Taylor rule has influenced the debate on monetary policies for the last two decades. Various suggestions are made by the Federal on the basis of the Taylor rule. Federal Open Market committee in suggested that by increasing the basis points to 150, the funds rate of the Federal may be increased up to 70 percent (ILBAS, 2013). MICROECONOMICS Answer1 The statement seemed reasonable; however the idea presented in the statement is vague. The statement can be considered true if the firm is defined in term of its owner. The shareholder of any firm would be pleased with increased dividend, they are aware of the fact that the increased dividend is directly related to the increased profitability of the firm. Shareholders sometimes prefer to sacrifice the short-term profit of the firm, so that the firm may work for the acquisition of the long-term profit. They may let go the short term dividend of the firm, so that they may earn the long term benefits. While defining the firm in terms of the manager (decision maker), the ...Download file to see next pagesRead More
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