Aggregate Demand and Economic Crisis - Assignment Example

Macroeconomics Question two Aggregate demand Aggregate demand refers to the demand that is attainable and the marketcan very comfortably meet it. In this, the demand must be very equal to the supply. Aggregate demand, Z = C-Y/G However, C= 200+0.6(Y-T) = 200+ 0.6Y- 0.6T SI relation The Si relation refers to how the demand meets the supply vice versa. There can be one effective trade if the two are not concurrent. The demands introduces more money into the market while the supply brings either the good or service into the economy. (M/P)^d= 2Y-800i= SI relation. Should the bank decide to increase the nominal money supply to 1800, there are a number of aspects of the money market that get affected. The equilibrium gets shifted which may be both a good and a bad occurrence. In economics, a good thing is one which earns the business while a bad one is that which ends up in loses to the business. In economics, the guiding principle is to never lose, every amount of money leaving ones coffers must always earn more to the business. This increased influx of money is likely to lower the interest rates in the current market. Interest refers to the additional value that money earns especially from debtors. Money lending is a big business opportunity for banks; they give out money and retain a security which could be in the form of a motor vehicle logbook or a land title deed. When the debtor pays the money back to the bank, he pays a little more, the additional amount is referred top as the interest and is the profit that the banks get from such risky undertakings. Incase the debtor fails to re-service the loan; the security is sold to meet the defaulted amount. Equilibrium output= 200+ 0.6(Y-T) Y= 1800 while T= 150 Equilibrium output = 200+ 0.6(1800-150) = 200+990= 1190. The policy is aimed at making the bank having more capital base and liberalizing ther money market. By increasing the amount of money the economy becomes more stable, however, this must be done very cautiously to avoid instances of devaluation. Devaluation of currency is a case in which the value of an amount is lowered. This is different from recession in which more money equally purchases very little in that this is done by the government knowingly with an aim of later strengthening the economy from some of the benefit it tags along. Recession has no benefit whatsoever and is in fact a portrayal of an economic crisis (Miller 133). Question three The figure represents some miss-measurements since just as stated; the resultant figure should be zero. The economies in the world are self fulfilling, some could be very poor like that in Zimbabwe while others could be very strong such as the American but when al these are totaled up, the resultant figure is a zero and a failure to get a zero reflects discrepancies. The pattern is very clear, the developed countries are lending while the developing countries are borrowing. Borrowing is a sign of weakness and plays an integral role in the development of the vicious cycle. The more a country borrows the more indebted it becomes. Paying the debts becomes increasingly difficult and before long the economy of an independent state plunges into the dungeon as every citizen including the unborn is allocated a debt figure. The United States of America’s economy is very strong; this is attributable to its increased production of both goods and services. The economy is self sustaining and do not require any debts to accomplish any undertaking. Debts make countries poorer and any country that has enough to sustain its economy for a whole fiscal year and retain some more to lend out is a fully developed one. Germany is another developed country with a very stable economy, however, unlike the USA Germany is still held back with some debts she borrowed in her early years. This results in her being unable to produce enough to have surplus. The US has surplus that it very comfortably lends out to other developing countries thereby earning interest (Miller 105).. Question four The Chinese currency is getting more stable following a number of market activities that have been taking place in the country. From the report, the currency is soon to reach its equilibrium. Currency equilibrium is that level in which its value is equal to the dollar. When one Yuan fetches one dollar then that is referred to as Yuan’s equilibrium. Such developments are may be referred to as being either good or bad depending on the economy of the country and the type of economic activities taking place in the country. China is a big economy and the types of economic activities that take place in the market are official enough and take place in quantities capable of steering the economy into the American direction. For the Yuan to have a value similar to the dollar, the universally accepted currency, there must be a number of market activities that the country is engaged in that add value to their currency. All these activities are in a proportion that ensures that both the dollar and the local currency are in equal amount in the market, some of these activities could be deliberate actions by the central bank of the country to regulate the amounts of the two currencies floating in its market, but this would have severe economic ramifications. The bank would have to forcefully impose the mounts on to people and try to all it can to strike a balance in the two currencies. The “what it takes” may be intense borrowing from foreign monetary institutions such as the world bank and the international monetary fund which if is the case will later weigh very heavily ion the tax payers. The other legitimate economical activities would be the manipulation of the market forces to result in more foreign investors attracted to the money markets of the country, the money market includes the stock exchange, the bond markets, the foreign exchange among others. With more foreign investors flooding the local markets, the country continues to experience and over influx of the dollar making it exceed the local currency, this way the value of the local currency goes up considerable(Miller 97). The money markets are regulated and determined by speculation; this refers to the monetary rumors in the securities market. Following a political or any other that may affect the peaceful coexistence in a country; the amount of investments is more likely to retract, after the retraction is only natural that the stock portfolio will one day appreciate. Investors in the securities and money markets keep looking for these developments that may disrupt peace and the stability of a country. After determining one, they originate speculations which are far fetched lies about the future of a particular stock. One may say that because the president in country is assassinated, it is more likely that more investors will pull out of that market. While other traders pull out of the market, he begins to sell. At this time the business booms since there are very many buyers yet just a single seller, him. Shares on the other hand refer to means of ownership to a company. Those who own the shares of a particular company are its owners. This type of investment too plays a role in the local currency attaining equilibrium. Just as defined above equilibrium refers to a state in which the local currency fetches similar values as the dollar. The prices and trade in shares is also determined by rumors and speculation. In the example above , the president of country Y is assassinated, in the very case study, a trader may claim that since the president is dead, the country is more likely to plunge into anarchy, these are the type of news that investors fear the most, after the receipt of such information, they move about selling their shares. At such times there is more supply than demand, the prices of shares thus fall drastically, it is at such time that the investor begins purchasing. When later the market stabilizes and there is absolutely no war, he become rich as he sells the very shares he had bought but now he sells them very exorbitantly. However, when the two currencies balance out, there are a number of sectors in the economy that become unflavored. One such sector is the tourism sector. Tourists are not normally very rich people, they are just like any other family man who is interested in taking his family to a safari drive. In selecting their safari destination, they try to finds a country in which they few dollars may be converted into a lot of the local currency that would make them acquire more services. But when the value of the local currency is equivalent to that of the dollar, then tourists will shy a way from the market since it is just as good ad them being tourists in their own countries (Miller 145). Another source of profit in the money market is in the banking sector. Banks are large warehouses where people keep their money; this money does not just lied idly while in the banks, the bank uses these money to do business thereby earning more from a single person’s deposit. Examples of businesses that banks engage in to earn more profit include; lending, foreign exchange and the banking services. Banks give out loans and charge some interest for the loans. Before one is given a loan from a bank, he has to present a security, the security is normally liquidated incase he is not capable to pay re-service the loan. This way the bank ensures that it does not run into unnecessary loses. Work cited Miller, Dick. Acknowledging consumption: A review of new studies. London: Routledge, 1995. Print. Read More