Increased financial frictions automatically increase information asymmetry and as a result, there is some form of financial instability. Due to the instability in the financial system, the system lacks the capability of…
Download file to see previous pages...
(b) A scenario where the households become more optimistic can be classified under the demand shock. As households become optimistic in the future, they will tend to consume less (reduced demand), with the hope that maybe they are going to consume more in the future at relatively lower costs. As a result, producers will lower their level of production a little bit and also lower their prices as well. The effect of reduced prices of commodities is reduced level of inflation in the long run, in the economy.
(C) The case of favorable weather would be classified under the supply shock. Favorable weather may mean vast surplus of wheat and corn than the normal expected supply. A favorable weather may imply increases level of supply (output) and hence reduced prices of commodities. Continued reduction on the prices of commodities will lower the level of inflation in the long run
(d) The situation under which the steel workers go on strike for four weeks may be classified under the demand shock. The fact that the steel workers goes on strike means that they are no longer producing steel and the supply (output) of steel goes down immediately (short-run). Due to scarcity of steel, the price of steel goes high and if the prices remain high, there will be inflation in the long-run. This is shown in the graph below.
If we examine the case of the aggregate supply curve, we realize that it examines how different quantities of goods and services relate with the price level in the economy. The aggregate supply curve is upward sloping. However, the curve will tend to be vertical, or will become vertical in the long run. The supply will be affected by factors such as technology and overall improvements that affects productivity in the short-run and in the long-run. Factors such as increased efficiency and offering of public goods at relatively lower prices will shift the AS curve to the right. In the case where the public expects the level of interest
...Download file to see next pagesRead More
One of these important functions includes the regulation of money supply in the country. This is dealt by the monetary policy of that particular country that has its limitations and demand serious attention from not only the policy makers but also the public who would have to follow these policies.
The semi-pegged currency system dictates that all governments forming the European Union keep their currencies within a specified range. It stipulates that no currency of any given European Union member should fluctuate beyond 2.25 percent from the agreed and set central limit.
Financial markets are further divided into money markets and capital markets. Money markets deal in securities with a maturity date within one year. Capital markets mature in longer time frames. Bonds are debts with a maturity date, the investor loaned the business money. A stock has no maturity date; the investor owns a portion of the business.
This implies that it is that rate which is charged by financial institutions in Australia’s banking sector to other banks for overnight loans. This official cash rate is an important monetary policy instrument that influences other interest rates within the market.
This starts from the macro and the micro levels of the economy (Stationery Office, 2006 p. 34). The economic stability of a country/state depends on the effectiveness of economic policies advanced in order to regulate the fiscal activities within the country and at the international levels.
Monetary policy has thus become in technical term the economic’s nominal anchor. The monetary policy regime was modified with the objective of escalating its underlying effectiveness and corresponding transparency in the face of the alterations by the Mexico’s economy.
Without a sound monetary policy, our economy would spin out of control. The policies that are conducted by the Federal Reserve Board (The Fed) are the are some of the most influential factors that affects our economic livelihood.
Monetary policy attempts to influence demand for products by increasing and decreasing short term interest rates charged to banks for Federal Funds.
where te is the expected inflation rate at time t (with expectations formed at t-1), and t captures supply shocks to the Phillips curve at t. Reflecting the inflationary effects of tighter labour markets, f' is positive; reflecting the definition of u*, the natural rate of unemployment, as the rate of unemployment where actual and expected inflation match, f(0) is equal to zero.