Economic Strategies and Reforms - Assignment Example

Macro paper Question The economy sustains itself through the activities of all the market players. Important parties to the economy include the government through its employees who are officially referred to as civil servants . There are other players who also are part of the official government expenditures. Besides the government, the economy depends on the activities and operations of private investors. These are both foreign and local business people who provide jobs through their businesses. During an economic recession, both the private as well as public sectors regulate their spending. This is an action which results in a number of specific economic ramifications thus affecting the entire economy. However, as observed when the economy recovers from a crisis, more people lose their jobs thus resulting in an increase in the unemployment rate. This is an occurrence resulting from a number of economic strategies and reforms. These moves influence so many activities in the market. During the process of economic recovery, it is common for the unemployment rate to rise. At this time, the economy is normally still on a recovery path; a number of investors still do not have an effective understanding of the money market. To save their investments, most investors reduce the magnitude of operations of their investments which results in an increased unemployment rate. At such a time, the investors tend to cushion their employment from absolute loss. The promising economy urges them to stay operational yet the uncertainties of the past scare their bold investment plans. It is at such times that most businesses decide to stay operational but limit the number of their employees. This curtails their investment. In such a scenario, a loss in an undertaking does not result in a significant loss of assets. In addition, during the recovery, the government also reviews its spending rates resulting in reduced spending. Reduced government spending affects several sectors of the economy. It should be noted that the government is a producer as well as a consumer of products. Reduced government spending therefore sends down ripple effects to such companies that had previously depended on government funds to sustain their operations. This results in the companies imposing retrenchment policies thus causing the increase in the unemployment rate. The government has an elaborate employment technique, one that does not carry out the retrenchment of civil servants anyhow. In such circumstances, civil servants reserve their positions since the government rarely imposes retrenchment policies on them. To survive from a slow pace of production associated with economic crises, most governments privatize their corporations thereby giving private entities the authority to dismiss and hire former government employees. The privatization places such companies under new management with reviewed spending which may further result in unemployment. However, the government makes money from such proceeds thus recovering from the effects of the crunch. Furthermore, the private institutions contribute more money and direct input to the economy thus hastening the recovery process. Additionally, most economies stay conscious of the value of their currencies. A strong economy has a strong currency. It is prudent that such an economy regulates the inflation rate in a process that corresponds to the regulation of the amount of money in the market. Inflation refers to a state of the economy when the prices of basic commodities are high in relation to the income of the general populace. This results from the devaluation of the currency and the subsequent increase of the currency in the market. To recover from a poor economy, the government holds back on the money resulting in a market that has small but highly valuable currency. This tendency results in reduced financial activity which instigates the unemployment of even more employees from the private sector. This contributes to the rising unemployment rate despite the recovering economy. Question 2 Bank reserves refer to the minimal amount of liquidity that the banks retain to stay operational. Lowering this amount will result in an automatic change in the operations of the local banks. The local banks will engage in increased investing and widen their lending rates to entice more investors. As more investors seek borrowings and the banks engage their customers in such transactions, the reserve ratio is likely to shift. Reserve ratio refers to the ratio between the money reserved by the bank to the amount in circulation. Lowered reserve levels allow banks to send more into the economy through borrowing and other bank trading thus shifting the ratio further. Excess reserves on the other hand refer to the amount of money above the reserve limits imposed by the central bank. In such a scenario, this money is more likely to be lowered. Furthermore, the reduced reserve level is likely to result in an increased spending and investment. This arises from the fact that lowered level allows the other commercial to widen their lending rates and levels. This is more likely to attract more investors to seek loans since the economy is weak enough and the business persons have no other sources of funding. The business people thus turn to the commercial banks which stretch their lending bases. The banks, on the other hand, seek to tap into this increased bank activity as they revise their lending policies in their favor. Among the most common lending policies of the commercial banks are the deposit multipliers in which the banks require their customers to deposit more money in their personal and business accounts thus increasing their liquidity. This will therefore entice more investors to deposit more money thereby strengthening the liquidity level of the banks. This coincidentally results in an increased financial activity in the financial market. Just as explained earlier, the economy is a self-sustaining cycle that relies on every financial activity in the market. The financial activities are regulated by commercial banks which legitimizes the changes experienced in the other aspects of the economy following the lowering of the commercial banks reserve levels of the central bank. Question 3 The gross domestic product is a means of measuring the strength of an economy. The mechanism refers to the market value of all officially recognized products and services in a nation within a period of a year. This mechanism evaluates the purchasing patterns in the country and in so doing, it evaluates the factors that determine the population’s ability to purchase the products in the market. The gross domestic product’s equilibrium is an imaginary financial line along which an average citizen in a nation is capable of purchasing the basic products in the market. In the two sides of the equilibrium are two extremes; one infers a total economic failure in which a majority of the population is unable of purchasing products from the market this infers a weak economy. The other extreme presents a market situation in which a bigger percentage of the population has a higher purchasing power which represents a strong economy. The economy of the country operates above the equilibrium thereby implying that no American lives under the poverty line and that every American has the power to purchase products from the market. Unemployment is the state of a section of the population having no financially viable engagement. Every person in a population deserves a source of income of which the most common of which are employments. However, a fully employable population and a hundred percent employment rate is always never realized in any economy since there exists a portion of the population considered unemployable. The employment rate plays a bigger role in determining the gross domestic product since it determines the purchasing power of the population. A healthy economy is one that can sustain itself; the American economy is healthy enough to account for every person through the provision of employment and other basic life survival services. The most common types of unemployment include seasonal unemployment in which the season determines the availability of employment. This is a type of employment which is rampant in the tourism sector and other seasonal contracts that take time to materialize. The other type of unemployment is the voluntary one in which the market has adequate employment opportunities yet the qualified opt not to seek the employment. This arises from a developed economy in which the qualified have other sources of income. Involuntary unemployment, on the other hand, refers to a situation in which the market cannot meet the demand for employment which results in more qualified workforce staying unemployment. Finally, the structured unemployment refers to a scenario in which the qualified and employable is sought for employment in irrelevant fields of practice thus resulting in unemployment. The American economy has faced a number of challenges that have resulted in the involuntary in a number of sectors. However as the economy strengthens, more people resort to voluntary unemployment. The economic gap refers to the disparities in the distribution of the country’s resources. The wealthy among these disparities are the gap within the rich and the poor. In an economy in which the gap is extremely wide, the purchasing pattern leans towards the rich thus burdening the poor. This affects the development of the economy. The other gap is the income inequality in which some people earn a lot of money while the other section earns very little. This also affects the purchasing pattern thus influencing the gross domestic product; the other gap is wealth disparity. The members of parliament formulate and implement policies that govern the country some of which are economic. Some of these policies include taxation policies; taxation is the main mechanism through which the government collects revenue from the populace. An effective taxation scheme should not only protect the populace but also earn the country enough money to keep it operating. Taxes affect the prices of products and services in a country and will affect the gross domestic product. Furthermore, the parliament formulates and approves of the budget and the government spending thus determining the amount of money that the government pumps into the economy. In doing these, the lawmakers use a combination of both the monetary and the fiscal policies. Adjusting the government spending alone does not solve the economic issues. However, it will result in reduced currency in the market thereby reducing the consumption levels. In the long run, it will contain the inflation levels. Read More