(5 points) The activity by bank is called money creation because the central bank and the Fed both rely on banks to implement and enhance the effects. Even though the banks are not directly involved in money supply or money market policy conduction, it does work as a important money creation. 4. If a bank becomes worried about the future, it may decide to increase the level of excess reserves it holds in hopes of avoiding a trip to the Fed's discount
Possibility of hot money flow. High interest rates might be attractive enough for foreign investors and increase their incentives to save in UK, this way demand for £ will increase and cause appreciation of currency. Appreciation as a result will make exports less attractive and less competitive on global market; likewise, imports consumption might rise, as they will be more attractive domestically. Although, this is likely to have minimal impact due to recent depreciation of the currency and strong global expansion All of those changes result in falling aggregate demand (AD) (which consists of Consumption, Investment, Government Spending and Net Exports), as investment, consumption and net exports all will be reduced. Following diagram will help understand how this affects economy.
A failure of the Central Bank to region in the MS also makes the demand- pull inflation worse. Next, cost -push or supply -side inflation. Under cost -push or supply -side inflation, it occurs when the price of input increase. If price increase, it will lead to decrease the ability of producer to generate output because their unit cost of production increase. The third cause is expectations of future prices.
And on the other hand, too low or decreasing inflation can also affect economy in term rate of employment and high output. But low
That is, the gross domestic product increases as a result of an increase in per capita income as the country experiences a technological progress which increases its productive efficiency. This is because such increase in productive efficiency increases capital and labor consumption. The second assumption is that the government does not engage in any trade as this will influence policy and change it into endogenous trade rather than exogenous trade. In addition, there should be no international trade (Agénor, 2004; Barro & Sala-i-Martin, 2004; Barro,
3. The Federal Reserve controls the monetary base through open market operations and extensions of loans to financial institutions, and has better control over the monetary base than over reserves. Although float and Treasury deposits with the Fed undergo substantial short-run fluctuations, which complicate control of the monetary base, they do not prevent the Fed from accurately controlling it. 4. A single bank can make loans up to the amount of its excess reserves, thereby creating an equal amount of deposits.
An economy with a production level higher than its natural level will lead to an inflation. The central bank and governments constantly regulate increase in price level of goods and services in order to avoid hyperinflation which would be damaging to a country’s economy. In the medium or long run, an economy with a production level above its natural level can return to equilibrium using a number of methods. In this essay, price is adjusted by wage setters from short run to medium run and central bank implements monetary contraction to lower output. Phillips Curve will be used to show the effect of inflation on unemployment and data on France will be used to illustrate my answers.
This may shift the long run average supply curve to the right, from LRAS1 to LRAS2 (Refer to Diagram B). Moreover, the increase in investment will also cause a rise in output and profit, which indirectly increase the competitiveness of a business. The high profit of a business will increase their workers’ pays to encourage the high level of work contributions. This allow people to gain more income. Thus, people are more willing to spend their incomes on more goods and services.
Inflation occurs when the buying power of a dollar decreases. “As inflation rises, every dollar you own buys a smaller percentage of a good or service. When prices rise, and alternatively when the value of money falls you have inflation” (Hayes). For this reason a minimum wage increase would never work. If employers are paying employees more then they will raise costs to offset the added expenses.
Faster economic growth is possible if the monetary policy succeeds in maintaining income and price stability. 2. Regulation, Supervision and Development of Financial Stability: Financial stability means the ability of the economy to absorb shocks and maintain confidence in financial system. Threats to financial stability can come from internal and external shocks. Such shocks can destabilize the country’s financial system.