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What function does the money supply serve in our economy to influence certain economic variables

Is macroeconomics the same for all countries? What three main differences separate micro- and macroeconomics? First, microeconomics studies individual components, whereas macroeconomics studies the economy as a whole. Second, controversy aside, government involvement in microeconomics is relatively small, and relegated to public goods, regulation, and welfare. But, controversy notwithstanding, government involvement in macroeconomics is rather substantial, nearly total; it is only government that makes and enforces monetary and fiscal policy.

Third, whereas microeconomics has been around since the mid eighteenth century, macroeconomics began only as a reaction to the Great Depression of the 1930s. Who introduced macroeconomics, and what was its major objective? John Maynard Keynes, an English economist, hence macroeconomics is also referred to as Keynesianism.

Keynes argued that by itself the market is unable to generate enough savings capital to sustain investment at full employment levels; and that this could be achieved only with the periodic sharp increase in government spending. Why is macroeconomics said to be a typical public good? Public goods and services bads do not ascribe to the laws of market exchange, their consumption is indivisible, so their consumers don't feel the responsibility to pay for them, and their lawful owners lack the necessary control to charge for and profit from trading them.

First, gathering, analyzing, and distributing information that goes into the making of macroeconomic policy is very expensive, requiring the hiring of thousands of workers, including some of the nations' top macroeconomists and statisticians, a task no single individual however rich can perform, leaving it to government-a typical collective good.

How the Money Supply Affects GDP

Second, the effects of a stable economy are enjoyed by all, producers: What are economic indicators of macro-economic variables; and why is knowledge about them important? Macroeconomic variables are indicators or main signposts signaling the current trends in the economy Like all experts, the government, in order to do a good job of macro-managing the economy, must study, analyze, and understand the major variables that determine the current behavior of the macro-economy.

So government must understand the forces of economic growth, why and when recession or inflation occur, and anticipate these trends, as well as what mixture of policy will be most suitable for curing whatever ills the economy. Of the many economic indicators listed on page 120-21 of your book, you will be tested on knowledge about these twelve: How is growth measured?

It is measured over time relative to the performance of the economy over the exact same period in the immediate past, such as the economic calender year, that is, Oct. Why is growth important? In which three ways can growth be defined? GNP stands for the Gross National Product, a measurement of the annual economic productivity of the property and labor of all but only citizens of a country regardless where this activity occurs in the world. GDP stands for the Gross Domestic Product, a measurement of the annual productivity of the property and labor of all citizens and foreign residents within the geographic borders of a country including its foreign territories such as embassies and purchased military bases abroad.

Whether you measure the GDP by spending, by production, or by income, be sure to count final market value of goods and services only once. Be sure to exclude: Second, GDP exaggerates actual improvement in the standard of living. Take a look at figure on page 117 of your book. Real income is nominal or money or unadjusted income adjusted for inflation. Practice with Table 10: Therefore, the real-GDP is no more accurate than as a comparison between two economic periods; Paul is taller than John, but shorter than James.

GDP reflects only the dollar worth of the economy, not the economic well-being of citizens. Short term economic forecast, up to 8 quarters ahead.

Medium-term economic forecast, is between 2 to ten years Long-term forecast is any prediction more than ten years ahead; special cases call for prediction of 30 years ahead. Forecasting is made a little easier by the recurrent nature of the business cycle, enabling macro-economists to establish statistical regularities as formula for predicting the economy.

The Contribution of Monetary Policy to Economic Growth

But statistics not withstanding, economic forecasting is not a precise science and predictions may often be off target. Yet forecasting still serves the useful purpose of giving us, within broad limits, a sense of where the economy may be headed, allowing consumers, producers and government macroeconomic policy planners to plan ahead with some level of rational certainty. The Business Cycle No economy however strong ever follows a straight growth path; all economies fluctuate over time.

Fluctuations in the economy GDP over time are referred to as business cycles. The Great Depression forced neoclassical economists to accept for the first time that business cycles and the extent of fluctuations in the economy are both significant.

For a number of theoretic and historical reasons, both classical 1776-1871 as well as neoclassical economists had prior to the Great Depression, believed business cycles would be weak and insignificant for the overall production. World War I, the cause of the first serious disturbance in the U. Since then, the US economy has been pro-growth with five notable recessions, none of which lasted long, suggesting the overall economy remains healthy, reaching its historical high in the current 1993 to 2000 period.

Nature of a Typical Business Cycle. The typical GDP growth path goes from trough to recovery to peak to decline and back to trough Figure 10. First, though they follow typical patterns, no two business cycles are ever the same. Second, with increased economic interdependence and interconnectedness among countries, especially among the Western industrial countries, business cycle changes in one country quickly draw the other economies into similar behavior.

Third, the business cycle is an inherent part of all money-using economies, so nothing to worry about when the economy goes down south, provided it is healthy enough to recover.

A change in the flow of the economy GDP occurs whenever there is a significant change in the money supply, a change which could be caused by any of the following: Four, forces at work in a typical business cycle are cumulative, each phase generating its own momentum and counteractive forces that beget the next phase.

Five, Government policy intended to control one side of the business cycle might wind up inducing the other. More on this later.

The role of fiscal and monetary policies in the stabilisation of the economic cycle

Six and finally, fluctuations in the GDP over time are not even across industry. So What Is a Healthy Economy? The economy is healthy, that is, stable and steady over the long term if: Are the concepts of a healthy and an efficient economy the same things? No, they are not the same. A healthy economy can exist at any level below this superlative but has the potential of achieving its productive potential. A high rate of resource and labor utilization gives indication the economy is on an upward swing nearing its peak, whereas a low resources utilization gives the opposite indication of an economy significantly underperforming its capability, and therefore, not healthy.

Fine-tuning the economy is the calculated alternating between anti-inflationary and anti-recessionary policy measures in other to keep the economy stable in the happy middle between inflation and recession and to minimize the impact on consumers of GDP fluctuations.

What is a Full-employment Economy?

Factors which influence the exchange rate

An efficient economy is one that has the two pre-requisites for solving the scarcity problem in an optimal manner. First, it means the economy is in full employment, meaning all available resource, including human skills, are being engaged in production.

Full employment economy is said to exist whenever the unemployment rate falls below 5. Full employment unemployment is said to be voluntary because economists believe that at full employment, all it will take to fine jobs is a change in attitude on the part of the unemployed.

Those likely to choose voluntary unemployment when the economy is at full employment will include those between jobs-the frictional unemployment- social drop-outs, workers who leave their jobs to raise children.

Second, an efficient economy must also have full production, utilization of resources where they are most appropriate and so likely to be most productive. An efficient economy must not have significant underemployment nor underutilization of resources. But an efficient economy is by itself not synonymous with development. A country is said to be developed if it has all the elements of an efficient and healthy economy operating within a socially civilized environment including the practice of the rule of law, democracy, and justice, especially for its less politically powerful social and economic groups.

Thus unemployment frightens politicians, while macro-economists and political economists are mainly worried about inflation Seasonal unemployment is tired to seasonal occupations, and not a major concern for the economy except for those seasonal workers whose pay is too little to save up against the expected unemployment season. Cyclical unemployment is part and parcel of a money economy, and is brought on by speculation of profits and bursts in business.

Economists look favorably on a high rate of frictional unemployment as indication the economy is strong enough to give workers confidence to seek to match their skills to higher paying jobs, an indication of a healthy economy.

Structural unemployment caused by a lag between change in production and change in labor skills and mobilitymeaning the economy becomes rigid, unable to respond to both market as well as policy incentives to change course-the lost of fine tuning ability. Structural unemployment tends to be regional, and industry and racially-specific, not across the board, as a result, aggregate policy measures policy incentives directed at the economy as a whole is not very effective in removing pockets of structural unemployment.

But just two is enough to set of recessionary alarms and speculative reaction.

Supply of Money in an Economy and Its Components

The National Bureau of Statistics defines a recession as any period in which the GDP dropped for two successive quarters six months. The obvious difference is a matter of judgment, the depth of the fall in output, the severity of labor unemployment, and the Bureau's known sensitivity to the political implications of a decline in economic activity.

A protracted and severe recession is a depression. Speculative recession acts as a self-fulfilling prophesy: Because economic agents suspect there would be a recession, they adopt reactionary measures that actually trigger one, e. Recession per se is not bad, provided the economy has no major structural constraints that might prevent it from responding to market and policy incentives to change course. Apart from the four causes of unemployment named above, recession may occur as a result of mere business speculation and the reaction of rational consumers and producers to shield themselves from the negative impact of a future trend in the economy.

Recession accompanied by unemployment is not always bad: At times, it becomes the only cure against inflation the bigger of the two evils. The philip curve theory argues that the economy cannot stay at full employment for a long time without triggering inflation.

How GDP Affects the Money Supply

This forces policy makers to accept unemployment to fight inflation. Inflation is particularly bad for the economy because it affects everybody and all segments of the economy, distorting prices and undermining the clear relationship that must exist between value and price, the very basis of market exchange. Demand-pull inflation occurs whenever there is a sudden and significant jump in consumer demand which stays way ahead of supply.

A special form of cost-push inflation is market power inflation, or profit-push inflation, the result of monopolies' unchallenged ability to set prices above price equilibrium prices and to force consumers to absorb those prices. Expectation inflation is caused by an inflationary psychosis, a crippling fear of inflation that so dominates the public it forces consumers and producers into taking actions that actually trigger inflation as a self-fulfilling prophesy.

Full-employment inflation is caused when demand continues to be strong when the economy is already at full employment and all available resources, including labor, is already engaged. Supplying that demand will add to cost and prices because: To capture the consumption pattern of a typical city dweller, it was necessary to change some items in the typical basket of goods and services; some food and beverage items and medical care have been replaced by things that reflect our modern communications age like telephones, computers, and the cost of education.

Increases in the CPI is both indication of increased prices as well as consumers confidence to spend money as opposed to consumers' fear of pending disaster which would cause them to safe against an uncertain future. Increased consumer prices in the face of increased consumer confidence in the economy amounts to double jeopardy because it means consumers are buying more at a time when the purchasing power of their dollars has declined. Interest rates reach a peak just before recession, and fall throughout the recession.

Rising interest rates signal an expanding economy, and when already high interest rates begin to rise even further and faster, that is a sure sign of the on set of inflation. Fine-tuning interest rates is a key monetary instrument of government: To fight recession, lower already low interest rates.