StudentShare solutions
Triangle menu

Closed Economy - Essay Example

Not dowloaded yet

Extract of sample
Closed Economy

An increase in money supply will cause an increase in the level of prices. (Stretton (1999))
The law of demand states that when the level of demand rises beyond the level of supply then the price rises, if the level of demand falls below the level of supply then the level of prices will go down, but the level of the price fall depends on the elasticity of supply and demand.
Theoretically the increase in prices is caused by the increase in customer expenditure and this causes an increase in aggregate demand and as according to the law of demand and supply, when demand increases the prices will rise. therefore in this case the level of prices will rise in the short run but will eventually move back to the original position in the long run when the high prices eventually causes an incentive to suppliers who eventually meet the demand and therefore prices will fall.
Aggr dd is the aggregate demand while Agg ss are the aggregate supply, when you increase the money supply in an economy, people will tend to spend the money and therefore the aggregate demand increases therefore shifting the aggregate demand to the left, when aggregate demand increases beyond the level of aggregate supply the price of goods...
to the left, when aggregate demand increases beyond the level of aggregate supply the price of goods rises as depicted by the movement from p2 to p1, national output increases from y1 to y2.
For a government to increase the money supply it simply needs to decrease the interest rates which can be defined as the opportunity cost of borrowing money, when the interest rates are decreased the opportunity cost of borrowing money decreases and more people will acquire loans and borrow funds from banks, this will increase the amount of money in the economy.
Another way in which the government can increase the money supply is through decreasing the reserve ratio maintained by the central bank such that banks will now be required to maintain a lower amount with that bank and therefore they will be in a position to undertake credit creation and therefore increase money supply.


2.) An increase in the willingness to work

An increase in the willingness to work means that the marginal productivity of labour increases, this increase in labour productivity therefore output will rise. The cost of production will go down and supply will rise, when supply rises we expect prices to go down due to the law of demand.
An increase in the willingness to work is therefore an advantage to the economy, this is because an increase in the willingness to work will increase the marginal productivity of labour and therefore increase the productivity of labour and at the same time reduce of the cost of production of the various goods and services in an economy. Therefore the increase in the willingness to work will cause a shift in the aggregate supply because the producers will now have the opportunity to produce more at lower costs, prices will also go down due to the fact that supply exceeds ...Show more

Summary

A closed economy is an economy whose national income and output does not include the foreign sector, that is to say exports and imports are not included in the calculation of national output. In a closed economy where flexible wages and prices then an increase in the nominal quantity mean that the money in circulation in that economy will increase.
Author : ghudson
Closed Economy essay example
Read Text Preview
Save Your Time for More Important Things
Let us write or edit the essay on your topic
"Closed Economy"
with a personal 20% discount.
Grab the best paper

Related Essays

Explain the difference between an open economy and a closed economy
As eHow.com puts it, “a closed economy is just a theoretical concept as no perfectly closed economies are still in existence.”1Globalization has led to removal of barriers to trade and allowed flow of capital and employees in and out of the country. Advocates of an open economy argue that opening the country to international trade creates employment, provides a variety of goods and services to consumers at low prices, increased investment opportunities as well as economic growth.
5 pages (1250 words) Essay
Definition and Explanation of Closed and Open Economic Systems
In a closed economic country, all economic activities are conducted within the boundary of the country. Such an economy means the country does not accept imports from other countries and does not export to foreign countries. The main objective of this type of economy is to make everything available for people within the confines of the economy.
4 pages (1000 words) Essay
Open and closed systems
A closed economy sustains itself and the major players include households, firms, government as well as market factors. A good example of a closed economy is where a country does not deal with other foreign economies. The outer flow in the closed economy is one way.
3 pages (750 words) Essay
The economy today
Milton Friedman had said inflation was just a monetary phenomenon and macro policy couldn’t shift the economy to higher levels of employment. The impact from macro policy debates starts the macro section with a treatment of long-run growth as a function of supply side productivity factors.
5 pages (1250 words) Essay
Spain Economy
The first section of the paper showed how the German mark led to the depreciation of the peseta which in turn spurred the growth in exports and discouraged imports, lowered private investment and created discrepancy in government budgets.
6 pages (1500 words) Essay
Macroeconomics Degree Essay
Where C is consumption and Y is income, further analysis of the function shows that there is an autonomous value that is not affected by income, further analysis also shows that we consider the disposable income and not the gross income, disposable income of a consumer is the income minus taxes by the government, the model therefore is stated as follows:
4 pages (1000 words) Essay
Closed Economy
According to the author of the text, United States has been constantly warning North Korea to stop its nuclear program or else it would have to face some serious consequences. Besides, not the only USA but also many other countries have closed their doors for trade, exchange, diplomatic relations and any kind of contact with North Korea, leaving it in isolation.
12 pages (3000 words) Essay
Taxes System
The main objective of this type of economy is to make everything available for people within the confines of the economy. Thus, it can be stated that such a country will not engage in any type of trade or have even the slightest of
3 pages (750 words) Essay
Macroeconomics-long run effect on budget cutting in the uk
of the budget cut on the macroeconomic variables like real wages, investment, national saving, real interest rate, nominal exchange rate, real exchange rate and trade balance in the long run. The term nominal interest rate represents the rate of interest before taking inflation
9 pages (2250 words) Essay
Saudi Arabia & Bahrain Economy
In 2009, production of oil stood at about 8 million barrels every day, less than a number of barrels recorded in 2008 by 1.1million. The oil industry
6 pages (1500 words) Essay
Get a custom paper written
by a pro under your requirements!
Win a special DISCOUNT!
Put in your e-mail and click the button with your lucky finger
Your email
YOUR PRIZE:
Apply my DISCOUNT
Comments (0)
Rate this paper:
Thank you! Your comment has been sent and will be posted after moderation