As aggregate demand affects the supply (production, employment and inflation) they saw it as the government's role to build it back up using monetary and fiscal policies. Similar to Classical economists, Keynesian believe the economy comprises the same part: consumer spending, government spending, and business investments. However the major difference is that Keynesians believed government spending could help account for the lack of consumer spending and investment. The Keynesian theory also was based on the idea that wages and prices were sticky and that is would give aggregate supply a horizontal line in the short run. Overall, the main idea of the Keynesian Economist was to save and create jobs and
Keynes’s theory of business cycle is both related to the fiscal policy and the monetary policy of the economy since he related the recessions and recovery processes with aggregate demand, highly determined by the fiscal policy, and the interest rate, which is fixed by monetary policies. According to the Keynesian school of thought, in the short run, the level of income, output and employment are the three factors linked to aggregate demand. This leads us to the fact that the fluctuations in the economic activity are of because of rises, expansion, and falls, recession, in aggregate demand. Keynes also argued that investment demand is unstable and volatile which brings the
Central banks in various countries often reserve currency as the operating target, because the bank will need to change the commercial bank reserves, and then to influence the intermediate target and the ultimate goal, no matter what kind of policy tools banks need this operation. Because commercial bank reserves fewer bank loans and investment ability is stronger, it will lead to an increase in money supply and derivative deposit, many scholars believe that reducing bank reserve currency markets mean monetary relaxation. Another aspect of the reserve increase of the market shows that monetary tightening. However, due to endogenous variables as interest rates, reserve as financial indicators are often misleading central bank. The monetary
The second principle is that not only are business cycles due to changes in the technological process or productivity but they’re created by rational maximizing individuals responding to these changes or shocks. It follows from this that business cycles are the economy’s optimal response to changes in productivity. According to the RBC theory a shock in productivity, which starts off the business cycle, propogates through the economoy through its effect on capital accumulation and productive capacity. The RBE theory aims to explain how this initial shock propagates through the economy. The RBC theory also says that changes we see in the levels of employment throughout business cycles are intertemporal substitutions for laour and that people are moving along their individual labour supply curves and they do so voluntarily.
Introduction: In this essay, the reader will recognize and have the clear knowledge why the simultaneous targeting of the money supply and interest rates is sometimes impossible to achieve; correspondingly, how the central banks intervene in the foreign market exchange will be as well made known. Moreover, the reader will as well comprehend what the Bretton Woods Agreement is all about, and its ability to influence foreign exchange rates to fluctuate freely. Why the simultaneous targeting of the money supply and interest rates is sometimes impossible to achieve? The money supply is tied to interest rates as study showcase. If the Federal Reserve increases interest rates, the demand for loans will plummet, and therefore the increase rate of
The simple panel regressions confirm the relationships between inflation, inflation variability and growth. The growth accounting framework made it possible to identify the main channels through which inflation reduces growth. The result of the paper has shown that the channel through which inflation affect economic growth and inflation negatively affects growth by reducing investment and by reducing rate of productivity growth. Fischer also argues that inflation distorts price mechanism, and hence influence economic growth negatively. Khan and Senhadji (2001) analyzed the inflation and growth relationship separately for industrial and developing countries.
His book “General Theory” was written during the period of great depression and was mainly the product of his prolonged study of unemployment in Britain. The post World War II era witnessed abrupt changes in the area of economic development. Basis of state intervention in the economy Keynes pointed out that the state intervention was necessary to deal with the ups and downs in the economy which we called trade cycles or business cycles. He believed that the only way to put demand for goods and services up and running was with the help of government spending so as to put money into the private sectors. The US president Franklin Roosevelt gave this a try in his massive public works
The quantitative easing is nothing but the monetary policy that is brought by the government when the standard monetary policy fails or also can be said as that the standard monetary policy has become in-effective. A national bank actualizes quantitative easing by purchasing defined measures of money related possessions from business banks and other private foundations, subsequently raising the costs of those budgetary holdings and bringing down their yield, while at the same time expanding the financial base. This is recognized from the more ordinary approach of purchasing or undercutting term government securities with a specific end goal to keep interbank premium rates at the fixed target value. Quantitative easing expands the cash supply
Further, domestic policies, instead of oil boom causes inflation and money is the main cause of macroeconomic fluctuations. Recently, Ebrahim, Inderwidi and King (2014) embarked on theoretical investigation of macroeconomic impact of oil price volatility. The result showed that oil price volatility constitutes a fundamental barrier to economic growth due to its damaging and destabilizing effect on macroeconomy. Precisely, they show that oil price volatility adversely affect aggregate consumption, investment, industrial production, unemployment and inflation particularly in non-OECD countries. Wilson, David, inyiama and Beatrice (2012) examined the relationship between oil price volatility and economic development in Nigeria.
Since long, the monetary policies have been struggling to value the industrial output and also competing with the real returns from the industrial investment. The fiscal policies have been acting as the linkage between the monetary and real economies. Now, as mentioned earlier, once the socio-economic forces are the resultant of the comingling of rent seeking wealth and capital, directly or indirectly, the fiscal system has been the eventual channel for the money leakage in the economy. This leaking marginal money popularly known as the black money is partly rooted in the currency leakage from the money multiplication process, which as a result, creates a parallel economy. Out of the avenues, the misappropriation of public money is cash intensive, others like – the proceeds from income and service tax evasion and the manipulation of the administrative overheads are not necessarily in the form of cash.