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EC 202 - Essay Example

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First one is real factor which is happened by demand based recession and the other one is monetary factor which is based on money and credit caused recession.
The first macroeconomic shock is demand based recession. It happens…
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EC 202
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EC 202

Download file to see previous pages... Even recession in other foreign countries also have an effect in demand of a product of United States. After falling of aggregate demand, if there are no chances of raising it, then the producers will bring down the production level and to maintain the cost they will lay-off employees. This leads to increase in unemployment. As output is low, the demand for money will also get lower and that is why interest rate will be low. Here, price level will be become unchanged.
The second shock is based on money and recession caused by credit limits. It is mainly caused for the low money supply and velocity with rises in price index. The reason behind it is tightened monetary policy where financial institutions try to reduce the amount of loan. As the money supply is low, the interest rate will become high which directly affects the demand for goods. And again same as demand caused recession the output and employment will be low.
The third shock is cost- push inflation. It occurs mainly because of increase in the cost. At the first stage, it happens because of the raise of wage which ultimately raises the cost and then the price also. So, demand will become low and a result of that production will also be low and employment will get effected. Because of high level of price demand for money will raise which means interest rate will also rise. These are the effects of cause - push inflation.
Growth problem indicate the higher level of gross domestic product (GDP). However, GDP increase the demand for money and so the interest rate becomes high but the demand for goods is comparatively low that is why producers start producing less which brings down the output as well as the employment. Ultimately the demand for money will become low which will lead to fall in interest rate.
It is not necessary that inflation will happen because of the money every time; it can be caused by demand also. The relationship ...Download file to see next pagesRead More
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