When there is a larger demand for more expensive commodities, the demand for money increases and the cost to borrow follows. This is following the theory of money demand. (Sparknotes, 2013) It is true for a decrease in output. The fewer consumers are willing to buy, the lower the demand of money is creating lower interest rates. This can be seen in the housing market.
On the other hand, the fall in consumption does heavily depend on where the fall is. If the fall in consumption is for domestic goods than this will have the reverse effect. The deficit will get worse as more money is being spent on imports in comparison to exports and so the the value of exports - imports will be much lower or a negative number. A fall in investment abroad will decrease the current account deficit because the difference between what you are spending money abroad on and what you are saving is not so far apart. Less investment abroad means that more money can be spent in the UK economy which greatly effects the current account.
Secondly high taxes create disincentives to work and this can be analysed through income and substitution effects. The substitute for work is leisure time and when taxes increase the opportunity cost for leisure time decreases, also people will have to work longer hours to earn the same post tax income causing disincentives as it reduces living standards as people must work longer and harder for the same incomes. This will create disincentives to work and so lead to a reduction in the labour force meaning less people in jobs and so less people paying income tax. Also as people earn less this way consumption in the economy falls therefore reducing the governments VAT recipts and corporate tax revenues and businesses make lower profits. This will lead to increases in the fiscal deficits as the government earns less and may be spending more in forms of social protection i.e.
A current account deficit means the country imports a greater value of goods and services than it exports. To reduce a current account deficit we need to either increase the value of exports and or reduce imports. Supply side policies aim to increase the productivity of the economy. If the manufacturing sector becomes more productive, the relative cost of British goods will fall and therefore they will become more competitive. This will help increase exports and reduce the current account deficit.
As situations happen around the world the internal economy is being affected, the price of oil increases and more money in the market should be created, but this will affect the inflation, as more money is in the market, the GDP keep growing and the unemployment is decreasing. To balance the economic growth, lower the inflation, and make a reasonable rate of unemployment it is important to take in consideration that typically if money is released into the system the real Gross Domestic Product will increase, creating opportunities of work and decreasing the unemployment rate. After indentifying the tools used for the Federal Reserve and analyzing the influence this has with the money supply the Feds can add or take money into the system to control the levels of inflation, increase the Gross Domestic Product and reduce the
Balance of payments is the difference in total value between payments into and out of a country over a given period. An appreciation means an increase in the value of a currency, and is worth more in terms of foreign currency. One impact of an appreciation on the current account is that exports are more expensive, so there is a fall in exports. Imports are cheaper so imports increase, creating a bigger deficit on the current account. This means that a strong real may lead to a worsening of the balance of trade – much depends on the value of price elasticity of demand for imports and exports.
This is because as price falls consumers can afford more goods as their real incomes increase and they feel richer. Real income is the bundle of goods and services that an individual can purchase. As we move from A1 to A2 utility increases from U1 to U2 because we move to a higher indifference curve so now the individual can now consume a better bundle of goods. This backs up the non satiation assumption of consumption which states more is better thus when we increase consumption total utility increase. The four axioms of consumption: Transitivity, Non-satiation, Marginal rate of substitution in consumption and Completeness must be met in order to be able to draw
Our money supply affects the country’s economy, interest rates, and borrowing. Erratic increase or decrease in prices of commodities of other items, if continued unabated for a substantial period, can be a source of imbalance in the economy. Why it is important to increase economic growth? It is important to increase economic growth to keep the economy moving forward to prevent job losses, and business closures, which in return you will have, a low money supply. My rationale for the Reserve Requirements would be by lowering the reserve requirements, and the banks will be able to have more money to loan, and then increasing the money supply.
Monetary policies influence the productivity of the country and this is how employment is affected. If there is a decrease in interest rates then more people are going to borrow money because the cost is lower. “Lower interest rates also change the willingness of financial institutions to lend money” (Federal Reserve Bank of San Francisco, 2011). With the financial institutions more willing to loan money, more people will borrow money and then there will be a higher demand for goods and services. As the demand for goods and services increase the demand for labor follows
Since the UK is a net importer of oil, higher oil prices would damage economic growth more than it benefitted it, as we’d have to pay more as a country in order to acquire the oil that we needed. Oil being a large part of consumer consumption would also contribute to economic slowdown: the higher prices of petrol and other oil-related products would mean that overall consumption decreases as consumers are forced to pay a higher price on certain goods and services. Higher oil prices would also lead to decreased consumer confidence as consumers may not feel comfortable with having to pay so much for petrol or other oil-based products, and therefore would also result in a decrease in overall consumer spending. This would also have negative implications on businesses as well: a decrease in consumer spending would subsequently lead to a decrease in the revenues businesses are able to make due to decreases in consumer spending. A rise in oil prices would also directly affect business performance as oil is a cost of production to firms, especially to those which produce oil related products, hence reducing profits and limiting the amount of money that firms can reinvest.