Economic Portfolio - Economic Growth Coursework Example | Topics and Well Written Essays - 750 words

frugalal Portfolio - Economic Growth - Coursework ExampleUsually, the monetary policy is executed by the central bank, through its capacity as the financial sector regulator or through its participation in the government deficit financing and dissonant market operation. Both the Fiscal and monetary policies are very essential not hardly due to their macroeconomic implications but also they are important in determining the policy jug of the state, direction and train of economic transfers which intern influence the overall distribution of wealth and income as head as the aim of economic activities and the structure of employment. According to Keynesian macroeconomics, The monetary and physical policies can be relied upon in controlling come demand (AD) and even the change in general price level of commodities i.e. inflation rate, with the view of stabilizing price and achieving full employment. Generally in a closed economy, aggregate demand (AD) include three major elements which are investment (I) consumption (C) and government disbursement (G). Where as, for an open economy, AD includes exports (X) and imports (Z) which gives nets export (NX) as the sum of the two. Most probably, C is always a positive share of the disposable (post-tax) income, which is negatively correlated i.e. negative outfit gap (NOG) with interest rate level. On the former(a) hand the reverse will give a positive output gap (POG). For in attitude, when consumers owe and credit becomes so expensive, the disposable income will definitely fall and this will make consumption to radioactive decay proportionate to it. In most cases, the AD curve will exhibit a negative sky in the price-output or price-income (P-Y) space this is due to the fact that, when prices increase, the real money supply (M/P) will decline. Thus, in order to restore the normal equilibriums between money demand and supply, the rate of interest has to rise. Immediately this happens, specie will become very e xpensive and both I and C decline as shown in diagram 1. Figure 3 Aggregate demand According to this model, it assumes that the economy is operating at a high level of employment or very depressed. Considering the above, the aggregate supply (AS) curve is so correspond to the P-Y space and firms will be willing to supply any amount at the prevailing prices. This shows that the output gap (income) is determined using the AD curve as shown at point E in figure 2. Figure 2 Aggregate supply and demand. If the economy starts operating at a level bellow capacity, the government must relax its monetary or fiscal policy stance i.e. increase the rate of taxation, lower the interest rate or increase expenditures so as to call forth I, G or C. This will definitely cause a shift of the AD curve to the right, increase output level, demand and employment (L) in the economy as shown in figure 3. Conservatively, if inflation is big(p) to take off and unemployment is abnormally low, the governmen t must consider tightening its monetary and fiscal policies. The resulting spending will cut down the higher interest rate or tax rate therefore limiting the existing inflationary pressures as illustrated bellow. Figure 3 Fine-tuning aggregate demand. Incase the government decides to bull its monetary and fiscal policy stance completely, and then it must be able to eliminate the economic cycle as well as