Interpreting Macroeconomic Conditions - Essay Example

he unemployment rates does undercut directly the major efforts put underway in the stabilization of the banking industry whenever crises arise like the recent financial crisis. The unemployment rates do increase the amount of toxic assets held by banks. This is because the unemployed borrowers end up defaulting on the loan agreements. This indicator also increases the cost of Term Asset-Backed Lending Facility that is meant to safeguard banks against defaulters. When many people are unemployed, they are unable to make deposits in the banks and thus the liquidity levels go low.

This indicator does exacerbate the frictions experienced in the credit market since rates go high. These frictions could end up posing obstacles that bring difficulties to banks in their quest to adjust nominal rates whenever they arise. Examples of these obstacles created by the inflation on banks is the ceiling by the government on interest rates in the banking sector; and those that arise from the banks’ response to the given incentives and risks, which are brought about by the existing regulations, laws, economic conditions and policies.

These frictions could also affect the economic growth by reducing the available amount to be borrowed. With high inflation, we get a situation where the interest rates keep rising and the cost of borrowing in the banking sector increases. The increased cost of borrowing due to inflation means that few borrowers would be willing to access loans thus reducing the portfolio of banks. This fiscal policy does affect the rate of economic growth since it adds to the aggregate demand. An increase in total federal spending, without a similar rise in tax receipts, means that for every dollar spent by the government, there is an income for the people that do satisfy the basic increment in the demand for the public commodities.

Thus the people are willing to spend and in essence do rise the income for the second wave of demand increases thus reducing the income