Post-Sandy Projects Project 1

The multiplier effect describes a situation, when there is an expansion
in the money supply, in an economy. The multiplier effect arises, when
an initial injection in the economy leads to a bigger final rise in
national income. When there is a multiplier effect, the capacity of
banking institutions in making loans to individuals and businesses
entities increases. The effect is seen as a rational series of
occurrences, which can be used in redirecting the economy of a given
nation. The multiplier effect is beneficial in allowing the economy
respond to present economic situations (Mankiw, 2012). The decision of
increasing the money supply in an economy is not a random one, which is
made without permitting for any legal regulations or standards, which
may apply to the process. Most economies depend on the reserve ratio so
as to establish the amount of expansion, which will occur as part of the
multiplier effect. This means that maintaining a balance between the
amount of deposits, which are made to the bank and the amount of money
every bank should hold as reserve helps in deciding the multiplier. As
increasing deposits are made, the bank has the ability in providing its
customers with vast loan opportunities that aid in stimulating the
economy. Establishing the amount of reserve required is a vital element
in determining the impact of the multiplier effect. If deemed prudent,
nations may opt to use their reserve or national bank systems in
increasing the requirement. This implies that a higher percentage of the
deposits should be kept in reserve as opposed to using in granting
loans. This approach can be applied in an economy to aid in slowing an
economy, which depicts signs of accelerating out of control. On the
other hand, lowering the requirement has a multiplier effect of aiding
in stimulating a sluggish economy through placing more money back in the
marketplace and boosting the purchase of commodities and services. When
applied cautiously, the multiplier effect can promote the current status
of the economy, permitting it to attain the anticipated balance between
extremes of inflation and recession.
If a government misconstrue the economic indicators, and create changes
to the reserve requirement, which generate outcomes other than those
anticipated, the subsequent multiplier effect may bring economic
situations that leave consumers in financial conditions that are worse
than before. Because of this reason, the responsibility of changing the
reserve requirement needs intense scrutiny of the happenings within the
economy, estimating what impact shifting the requirement may cause to
the various sectors, then establishing additional processes required to
occur simultaneously with the alterations so as to generate the most
beneficial effect to all concerned. The multiplier effect will work in
reverse, when the government cut its spending. Cutting of government
spending will lead to a decline in national income. Tax cuts will lead
to a multiplier effect since consumers will be encouraged to consume
more than before emanating from high incomes (Mankiw, 2012). There is no
reason to believe that, during recession period, the multiplier effect
is stronger than in close to full employment period. During a recession,
the aggregate demand is low, which implies that the multiplier effect is
almost negligible. However, during the recession period, the private
sector has non productive savings, which limits crowding effect. This
implies that there will be a positive multiplier effect during
recession.
Project 2
For quite a time, policy makers and economists have been on the look out
on the association between budget deficit and inflation. Policy makers
and economists argue that, there is a vast worry of associating
inflation with budget deficits. The worries of the association between
the two stems from the perspective that, whenever there is a budget
deficit, governments are most likely to finance their deficits through
borrowing either internally or from foreign institutions. Also,
governments may finance their budget deficits through printing money
into the economy. In case, the budget deficit spending, is remarkably
vast the spending may have an immense impact on the economy, which may
lead to inflation. Economic data for various countries analyzed by
policy makers and economists argue that the association of budget
deficits with inflation is not direct since the situations under which
budget deficits may lead to inflation usually depends some countries
that have high inflation also have vast government budget deficits. This
establishes an association between inflation and budget deficits. For
developed countries like United States, which has relatively low
inflation levels, there is little indication of a link between inflation
and budget deficit.
The principal to understanding the association between inflation and
budget deficits is the acknowledgment that there deficit spending is
associated to the quantity of resources circulating in the economy via
the government budget constraint that is the link between spending and
resources. At its most primary level, the budget constraint indicates
that resources spent have to come from somewhere. For instance, in the
case of national and local government, resources may come from taxes or
borrowing. On the other hand, the national government may apply monetary
policy to aid in financing the deficit. The range over which the
monetary policy is utilized in helping balance the budget is paramount
in determining the outcome of budget deficits on inflation. Most less
developed countries are highly affected by their budget deficits. In
most cases, the deficits in the governments tend to cause inflation. As
governments seek resources that aid in facilitating the budget deficit,
the governments end up hurting the economy. Take, for instance, in a
less developing country, the government may seek to facilitate its
budget deficit through taxation. Implementation of relatively high tax
levels to consumers will have an impact of reducing consumer spending
and may also reduce the rate of employment. A decline in the rate of
employment will imply that consumers will not be willing to spend more
in the economy since they do not have enough or extra resources to
spend. A decreased consumer spending emanating from high tax levels will
negatively affect the economy. The price tag for various commodities and
services will increase due to the expectations of government in raising
resources from taxes in facilitating the deficit (Mankiw, 2012).
Therefore, in such a scenario, there will be inflation associated with
high budget deficits. Also, if the government opts to increase the money
supply in order to facilitate the budget deficit this will also lead to
inflation. Increasing the money supply will lead to devaluation of the
currency. The devaluation of a national currency will have a dire
consequence to the economy since the currency will have no power over
other currencies. This will lead to a higher exchange rate of the
national currency with other currencies this will affect the price
charged per service or commodity. Therefore, this will lead to
inflation. Therefore, the influence of a budget deficit leading to
inflation will highly depend on the financial stability of the economy.
Project 3
Unemployment occurs, when individuals in an economy do not have work and
are continuously seeking employment opportunities. The unemployment rate
describes a measure of the frequency of unemployment the rate is
usually obtained through dividing the number of unemployed persons by
persons in the labor force (Mankiw, 2012). In dealing with the issue of
unemployment, the government may opt to use either monetary or fiscal
policy in solving the unemployment rate. Also, the government can
utilize both policies in solving the issue. It is possible for the
government to use either monetary or fiscal policy in pushing the
unemployment rate below a given rate. However, it is not possible to
keep the unemployment rate permanently below a certain rate, for
instance, 5%. The fiscal policy works through the use of government
spending and taxation in influencing the working of the economy. The
government may use expansionary fiscal policy in pushing the
unemployment rate below a certain rate. The expansionary fiscal policy
will have an effect of increasing the aggregate demand, which will lead
to relatively high output. The substantially high output will have an
effect of generating more job opportunities. It is through the
generation of more job opportunities that will lead to pushing of the
unemployment rate below a given percentage level. However, the
unemployment rate cannot remain permanently below the given rate since
classical economists argue that the fiscal policy will likely cause a
temporal increase in the real output. In the short run, expansionary
fiscal policy will have an effect of temporary increasing the real
output. This will be responsible for pushing the level of unemployment
below a certain rate. However, the effect will not last in the long run.
In the long run, an expansionary fiscal policy will be responsible for
causing inflation and will not increase the real output.
Therefore, in the long run, the expansionary fiscal policy will not be
capable of maintaining the unemployment rate below the rate attained
during the short run. Therefore, it is not feasible to apply a fiscal
policy, which will be capable of maintaining the unemployment rate below
a given rate. On the other hand, policy makers argue that monetary
policy can be used in pushing the unemployment rate below a certain
rate. However, this cannot be maintained on a permanent basis.
Increasing the money supply in the economy will lead to an increase in
output, which will foster job creation. Creation of employment
opportunities will have the effect of pushing the unemployment rate
below a given rate. However, this will only occur in the short run
since in the long run, the monetary policy will have negative impacts to
the economy since there will be wage and price inflation. This implies
that the level of unemployment, which was previously set below a given
level, will rise above the level. In the long run, the monetary policy
will not cause an increase in real Gross Domestic Product since there
is wage and price inflation, the level of unemployment will increase
above the rate in the short run. Economists and policy makers argue that
applying monetary policy in resolving the problem of unemployment will
only resolve the crisis in the short run. In the long run, the monetary
policy is likely to cause an increase in the inflation rate. Therefore,
the use of monetary and fiscal policies cannot permanently push the
unemployment rate below a given rate.
Project 4
Exchange rates describe the rate at which a country’s currency is
exchanged with another country’s currency. Different countries have
varying currencies, which have varied rates at which they exchange with
subsequent currencies (Mankiw, 2012). For instance, the U.S. dollar has
a given rate at which it can be exchanged with Sterling pounds. The
relative worth of a given currency in terms of another currency
indicates the exchange rate of the currency in regard to the other
currency. The rate between any two currencies usually changes with time.
It is remarkably impossible to maintain a constant exchange rate between
two currencies. In the last decade, several factors have influenced the
fall of the value of the dollar in the international market. One of the
factors that led to the fall of the dollar value in the international
market is the performance of the U.S. economy. The worth of the dollar
is grounded on its demand compared to other currencies. Incase more
individuals desire to have dollars, the rise in demand will have an
effect of triggering a rise in price. On the other hand, if the demand
falls, the value of the dollar will also drop. In the last decade, the
economy of the U. S. was not performing well since there were various
economic down turns. This made investors believe that the economy of the
United States was going to decline. This made most investors pull their
money out of the economy leading to collapse in the value of the dollar.
Foreign economies also played a part in the decline of the value of the
dollar.
Investors usually choose to put their resources in currencies, whose
economies are booming. In the last decade, the European economies were
booming, which made investors prefer putting their resources in the form
of European currency. This led to the falling price of the U.S. dollar.
Part of the declining dollar value is traced to an imbalance existing
between the amounts of commodities that the United States imported
compared to the number of commodities exported. In case a country
imports more than it exports, there is a likelihood of a trade deficit
occurring. In the last decade, most of the United States imports
exceeded imports this led to a trade deficit, which drastically led to
drop in the value of the dollar. Also, interest rate is another factor
contributing to a collapse in the worth of the dollar. The interest rate
at which banks offer to investors determines the price of the currency
(Mankiw, 2012). In the last decade, the value of the dollar decreased
since the rates of interest were relatively high this made most
investors prefer putting their resources in terms of other currencies.
This made the price of dollar drop drastically. In addition, inflation
is another chief factor that contributed immensely to fall in the price
of the dollar. In the previous decade, inflation and fears of inflation
made investors feel that they will not be capable of purchasing more
commodities than the currency used to afford before. This negatively
affected the price of the dollar leading to a collapse in the worth of
the dollar. For instance, in 2008, most investors feared the
consequences of a continued inflation. This led to investors gaining
confidence in holding their investment in terms of other currencies.
This led to the decline in the price of the dollar.
References
Mankiw, N. G. (2012). Principles of macroeconomics. Mason, OH:
South-Western Cengage Learning.
POST-SANDY PROJECTS PAGE * MERGEFORMAT 10
POST-SANDY PROJECTS