Three Equation Macro Model Simulation

It focuses on the excess in demand. Cost pushed inflation is occurred when the raising in the price level of production costs (inputs), which could lead to reduction in the aggregate supply of outputs. It focuses on the decrease in supply. 2. Caused by: Demand pulled inflation is caused by monetary and real factors (the increase in money supply government spending and foreign exchange rates).

An expansionary monetary policy (where the monetary authority of an economy purchases bonds to expand the money supply) would cause the LM curve to shift to the right. A contractionary fiscal policy (central bank buys back bonds to reduce the money supply in the economy) would shift the LM curve to the left. IS/LM curve shift can also cause fluctuations in Business Cycle. Business Cycle is the movement of GDP in the long term. It is usually a mixture of upward and downward movement.

. To ensure price stability is maintained the Reserve Bank adjust the OCR which influences prices in the economy. Price stability, which is when the purchasing power of money stays constant, is a desirable outcome of the government because inflation has several negative impacts on household and firms. Inflation erodes the values of households’ savings and causes those on a fixed income to lose purchasing power, the quantity of goods a set amount of money will buy. For firms, inflation causes cost or production to income since workers’ demand pay rises, as well as making it difficult to firms to plan for future.

They feel that inflation is the main problem of an economy and they can help deter inflation. They can buy and sell bonds to increase or decrease the money supply helping to keep prices stable and inflation constant. Monetarist strongly believe in the idea of one big central banks controlling the money supply going out ot the smaller banks. One tool montarist can use in terms of monetary policy is changing the reserve ratio. In other words, it is the amount of money that the banks can lend out to investors.

3.1.1. Monetary Policy Monetary Policies are the decisions guided by the monetary authority to manage the money supply or to change the interest rate to influence the rate of economic growth. When the monetary authority (or central bank) lowers the interest rates, it reduces the cost of borrowing which encourages people to take loans and mortgages; it also encourages investment. On top of that, people will become more willing to spend instead of saving. As a result, it increases the aggregate demand in the country.

The capital business sector is the business sector for securities, where organizations and the legislature can raise long haul stores. The capital business sector incorporates the stock exchange what 's more, the security market. Money related controllers, for example, the U.S. Securities and Exchange Commission, direct the capital markets in their individual nations to guarantee that financial specialists are ensured against extortion. The capital markets comprise of the essential business sector, where new issues are appropriate to financial specialists, and the optional business sector, where existing securities are exchanged. (n.d.).

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

Macroeconomic policy is a framework of a set of rules and regulations that the government implements to control the nation’s economy, unemployment rate, inflation, recessions, money supply, growth rate, interest rate, and many more. The two main monitoring macroeconomic policies are: • Fiscal policy • Monetary policy What is fiscal policy?

This is primarily a tool at the disposal of the central bank of a country which uses different tools to manage the macro economic variables of a country to keep the economy stable or to stabilize it in situations of fluctuations. Monetary policy can be expansionary or contractionary depending on whether the money supply is being increased or decreased in the system so as to affect economic growth, inflation, exchange rates with other currencies and

Contractionary monetary policy involves the manipulation of aggregate demand through the increasing of interest rate, which aims to decrease investment and consumption. With this policy the central bank would decrease money supply and more people would demand money. When there are lots of people demanding money but a limited supply of money the cost of borrowing that money increases. When the cost of money increases the demand for money decreases. Therefore, investment and consumption would decrease.

The Federal Reserve controls over the federal fund rates give it the ability to influence the general level of short-term market interest rates. The Fed has three main tools at its disposal to influence monetary policy which are the open-market operations, discount rate, and reserve requirements. b. Monetary policy is the actions of a central bank, currency board or other regulatory committee that determine the size and rate of the money supply, which in turn affects interest rates. The concept of Monetary Policy simply stated is that the cost of credit is reduced, more people and firms will borrow money and the economy will heat up. c. The controls that Federal Reserve used worked because the use of the three main tools the Fed uses is the most important that can manipulate monetary policy.

By 1977 inflation was at 5.22%, but started steadily increasing again, landing at 12.18% in 1979. The unemployment rate had peaked in 1975 at 8.5%, but slowly continued to drop through the last half of the decade, ending at 5.8% in 1979 (Bureau of Labor Statistics, n.d.). After the use of the stop-go monetary policy throughout the 1970s, the Phillips Curve proved to be unstable in the long-run because inflation and unemployment did not have an inverse relationship, rather they seemed to be moving together (Sablik,

In his book “Economics in One Lesson”, Henry Hazlitt states that economic fallacies are spawned by “the persistent tendency of men to see only the immediate effects of a given policy, or its effects only on a special group, and to neglect to inquire what the long-run effects of that policy will be not only on that special group but on all group; it is the fallacy of overlooking secondary consequences” (1979). Hazlitt continues to say that “The art of economics consists in looking not merely at the immediate but at the longer effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group but for all groups” (Hazlitt, 1979). The Federal Reserve is a good example of a system put in place for the