Keynesians who are also known as neoclassical synthesis develop their theory which considers some of ideas from the general theory. In their theory they develop a view that in short run output is influenced by aggregate demand especially in some economic disastrous such as depressions (Felderer and Homburg 1992:
By altering the cost, federal funds rate indirectly affects the spending and investment by households and businesses, which on their turn, impact output and inflation in the economy. The dynamic Three Equation Macro Model designed by Charles I. Jones allows us to trace the behavior of the Fed’s monetary policy and other economic variables over time when the economy is exposed to different kinds of shocks. The model incorporates IS curve along with the Phillips curve and the Taylor Rule, assuming the adaptive inflation
The rational expectations theory is often used to explain expected rates of inflation. For example, if inflation rates within an economy were higher than expected in the past, people take that into account along with other indicators to assume that inflation may further increase in the future. The rational expectations theory also explains how producers and suppliers use past events to predict future business operations. If a company believes that the price for its product will be higher in the future, for example, it will stop or slow production until the price rises. Since the company weakens supply while demand stays the same, the price will increase.
Consider one of the most influential theories in behavioral finance, Prospect Theory, which is developed by Daniel Kahneman and Amos Tversky with their published paper in 1979, investors value gains and losses differently. Losses have more emotional impact to investors than an equivalent amount of gains. Prospect theory states that people are risk-averse in the domain of gains and risk-seeking in the domain of losses; according to a more specific behavior pattern (fourfold pattern of risk, Tversky & Kahneman, 1992), people are risk-averse for gains with high probability but risk-seeking for gains with low probability, while people are risk-seeking for losses with high probability but risk-averse for losses with low probability (Tversky & Kahneman,
Macroprudential policy aims to manage financial stability through a much more targeted approach than monetary policy. Using monetary policy to fix a problem in the economy (e.g. asset prices are too high or too low) has many risks involved with it, for example causing high inflation or on the other hand causing deflation. Macroprudential policy takes a different approach and tries to correct imbalances in the economy more on a case-by-case basis instead of “shocking” the whole economy with monetary changes. So instead of trying to aid a housing bubble by raising interest rates and risking a rise in unemployment, a macroprudentialist will look to impose higher loan-to-value ratios on mortgage lendors, and will try to reign in just the housing part of the
On the Y-axis, we have interest rate whereas as the X-axis, we have the output (Y). The IS curve is affected by fiscal policies. An expansionary fiscal policy, which can be either a rise in government spending or a reduction in taxes, would shift the IS curve to the right. A slimming down of the fiscal policy, which can be either a cut in government spending or an escalation in taxes, would make the IS curve shift to the left. On the other hand, the LM curve is affected by Monetary Policy.
Inflation is a rate at which general price level increases for goods and services produced in a nation. When inflation exists, the purchasing power of a nations currency declines over time. Inflation not only reduces the level of business investment, but also the efficiency with which productive factors are put to use. The benefits of lowering inflation are great, according to the author Dornbusch, but also dependents on the rate of
Unemployment can explained by many factors as well as inflation. As one of the reasons of unemployment, inflation within the country can be considered. According to Phillips (1958) the inflation and the unemployment are tradeoffs, thus, the countries with lower
Short-run trade-off plays a key role in the analysis of business cycle where fluctuations in economy activity are measured by the production of goods and services or the number of people employed. However, the Phillips Curve illustrates the trade-off between inflation and unemployment. Alan (1997) has defined that the reliability of the modern Philips curve as the “clean little secret” of the macroeconomics. Stock and Watson (1999) conducted that “inflation forecasts produced by the Phillips curve are more accurate than forecasts based on other macroeconomic variables, such as interest rates, money, and commodity prices. These forecasts can be improved by using the Phillips curved based on the measures of real aggregate activity of unemployment.” All in all, the ten standards of financial matters assume a basic part in how a nation, a firm or a family deals with its rare assets proficiently while keeping up the value pie that fulfills every part 's monetary pie.
DISADVANTAGES Long term financial development puts an awful effect on the inhabitants of any nation. Long term economic developments may be identified with expansion, as inflations may increase. Inflations usually increase the cost of products on sale, and as the costs are higher, it will be an issue to the nationality in question to be able to buy their needs There is a limited amount of time involved in the growth of an economy as it involves an increase in GDP. The hypothesis and practice are both diverse. The hypothesis is the thing that economists are able to figure out for themselves; however, to be able to use the hypothesis in reality is the main task.