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

Economic Portfolio - Economic Growth - Coursework ExampleUsually, the monetary polity is executed by the central bank, through its capacity as the financial sector regulator or through its participation in the authorities dearth financing and open market operation. Both the Fiscal and monetary policies are very essential not only due to their macroeconomic implications but overly they are important in determining the insurance policy remit of the state, direction and level of economic transfers which intern influence the overall distribution of wealth and income as well as the level of economic activities and the structure of employment. According to Keynesian macroeconomics, The monetary and physical policies can be relied upon in controlling aggregate contend (AD) and even the change in general price level of commodities i.e. pomposity rate, with the view of stabilizing price and achieving full employment. Generally in a unappealing economy, aggregate demand (AD) include th ree major elements which are investment (I) con jointureption (C) and government spending (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 function of the disposable (post-tax) income, which is prejudiciously correlated i.e. negative output gap (NOG) with interest rate level. On the other hand the reverse testament give a positive output gap (POG). For instance, when consumers mortgage and credit becomes so expensive, the disposable income will definitely fall and this will make consumption to decline proportionate to it. In most cases, the AD curve will exhibit a negative slope 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 betwixt money demand and supply, the rate of interest has to rise. Immediately this happens, funds will become very expensive and both I and C decline as shown in diagram 1. Figure 3 pile up 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 parallel to the P-Y space and firms will be willing to supply any amount at the reign 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 raise I, G or C. This will definitely cause a shift of the AD curve to the right, increasing output level, demand and employment (L) in the economy as shown in figure 3. Conservatively, if inflation is threatening to take off and unemployment is abnormally low, th e government must consider tightening its monetary and fiscal policies. The resulting spending will cut down the higher(prenominal) interest rate or tax rate thus limiting the existing inflationary pressures as illustrated bellow. Figure 3 Fine-tuning aggregate demand. Incase the government decides to manipulate its monetary and fiscal policy stance completely, and then it must be able to eliminate the economic cycle as well as