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).

On the other hand, the LM curve is affected by Monetary Policy. 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.

. 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.

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. For example, when the global financial crisis broke in 2008, in UK, the Bank of England’s Monetary Policy Committee (MPC) lowers the interest rate from 4.5% to 0.5% less than 6 months to cut the cost of borrowing (BBC, 2014).

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? The spending policy implemented by the government that would affect the macroeconomic factors of the nation is known as fiscal policy. These policies control the nation’s unemployment rate, inflation, people’s buying behaviour determining to control the economy. In order to implement the fiscal policy, the government might reduce the taxes, which would let people pay less money on taxes and invest it somewhere

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. This would also cause a leftward shift of aggregate demand. The most efficient way to decrease inflation is through contractionary monetary policy.