Global Managerial Economics
By: Starlette Freitas
May 06, 2013
International Economics and Concepts
Governments measure the three most commonly-used concepts based on aggregate markets: the unemployment rate, the rate of inflation, and Gross Domestic Product. These rates and measurements are used to determine the health of an economy. Depending on its rates, it will show the strengths and weaknesses in its economic status of growth or downfall.
When the unemployment rate is high, that shows symptoms of malfunctioning in the economic system. This rate is incurred through a random amount of surveys in households and those answers of those surveys each month is how ...view middle of the document...
Likewise when productivity capacity is greater than demand, there is a decrease in inflation. Example is shown in chart below what the rates would look like. (2012)
GDP is the measured overall end value of goods and services within a country in a given period. If GDP decreases, aggregate supply and demand decreases, which causes inflation to increase as well as the unemployment rate raises too. This is also demonstrated in the above chart. An example would be one person runs a bakery and sells pies. Another is a masseuse who sells massages. If the owner of the bakery marries the masseuse, GDP is affected because instead of selling the product, they would be making pies for free for that person and giving massages to the other without charge which decreases supply and demand.
However, how does economy find the money to keep its economy afloat? Well the Federal Reserve was enacted the responsibility for setting monetary policy in 1913. In 1977, the goals of adding responsibility of promoting maximum output and employment as well as maintaining stable prices were made also in addition to this monetary policy. Monetary Policy was set in place for the federal government to ensure expansionary monetary stability and healthy flow of economy through a central bank controlling where allowed and maneuvering its money supply and interest rates. These interest rates are also known as the federal funds rate. Its interest rate is like a loan that is borrowed through the federal central bank from banks which have leftover federal fund balances to other banks that lack the minimum required federal funds balances by the federal system at a fluctuated rate depending on the time period it is borrowed for. This process allows for the money supply to sustain stable funding for economy.
The demand for money is affected by several factors, including the level of income, interest rates, and inflation as well as unpredicted future occurrences. The way in which these factors affect money demand is usually explained in terms of the three motives for demanding money: the transactions, the precautionary, and the speculative motives. Transactions motives is where exchanging of money between two entities take place. The demand for money is high because in order to receive money there needs to be money available to complete a transaction. For example, if a customer wants to buy a product from a store, the store needs cash flow to be able to give its customer change. If a customer bought something, and later decides to return where applicable, the business needs available income to reimburse the customer. As income or GDP rises, so does the demand for money. Precautionary motive would be commonly referred to as a savings or investment bonds for example where money is set aside in case of unexpected occurrences or losses that may happen in the future. Speculative motive would be considered assets that are purchased and has value worth over time that...