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Inflation
Objectives of the chapter:
1 - Introduction
2 - Definition of inflation
3 - Causes of inflation
4 - Effects of inflation
5 - Calculation of inflation
6 - Deflation
7 - Is inflation and deflation considered good for the economy of the country?
8 - Who is benefited most by inflation and deflation?
Introduction
- Inflation happens when the price of goods and services increase, while deflation takes place when the price of the goods and services decrease in the country. Inflation and deflation are the opposite sides of the same coin.
- Maintaining the balance between these two economic conditions, i.e. inflation and deflation is essential as the economy can quickly swing from one condition to the other as a result of these two conditions. keeps an eye on the levels of price changes and controls deflation or inflation by conducting monetary policy, such as setting interest rates.
1 - Definition of Inflation
- Inflation is the rate at which the prices for goods and services increase. Inflation often affects the buying capacity of consumers.
- Most Central banks try to limit inflation in order to keep their respective economies functioning efficiently. There are certain advantages as well as disadvantages to inflation.
- Inflation refers to the increase in the prices of the goods and services of daily use, such as food, housing, clothing, transport, recreation, consumer staples, etc.
2 - Causes of Inflation
1 - Money Supply
2 - National Debt
3 - Demand-Pull Effect
4 - Cost-Push Effect
5 - Exchange Rates
1 - Money Supply
➢ Excess currency (money) supply in an economy is one of the primary cause of inflation. This happens when the money supply/circulation in a nation grows above the economic growth, therefore reducing the value of the currency. ➢ In the modern era, countries have shifted from the traditional methods of valuing money with the amount of gold they possessed. Modern methods of money valuation are determined by the amount of currency that is in circulation which is then followed by the public’s perception of the value of that currency.
2 - National Debt
➢ There are a number of factors that influence national debt, which include the nations borrowing and spending. ➢ In a situation where a country’s debt increases, the respective country is left with two options: A- Taxes can be raised internally. B- Additional money can be printed to pay off the debt.
3 - Demand-Pull Effect
➢ The demand-pull effect states that in a growing economy as wages increase within an economy, people will have more money to spend on goods and services. ➢ The increase in demand for goods and services will result in companies raising prices that the consumers will bear in order to balance supply and demand.
4 - Cost-Push Effect
➢ is an inflation that results from an initial increase in costs. ➢ There are two main sources of increased costs. ➢ An increase in the money wage rate ➢ An increase in the money price of raw materials, such as oil.
5 - Exchange Rates
An economy with exposure to foreign markets mostly functions on the basis of the dollar value. In a trading global economy, exchange rates play an important factor in determining the rate of inflation.
Inflation
3 - Effects of Inflation
- When there is inflation in the country, the purchasing power of the people decreases as the prices of commodities and services are high.
- The value of currency unit decreases which impacts the cost of living in the country. When the rate of inflation is high, the cost of living also increases, which leads to a deceleration in economic growth.
- However, a healthy inflation rate around 2 percent is considered positive because it directly results in increasing wages and corporate profitability and maintains capital flowing in a growing economy.
4 - calculation of inflation
- Price Level and Inflation Rate:
- price level: a measure of the average prices of goods and services in the economy.
- We refer to the percentage increase in the price level from one year to the next as the inflation rate.
- we used the GDP deflator to measure changes in the price level. By measuring changes in the prices of different baskets of goods , we would come up with different measures. ◦ Two commonly-used measures are: ❖ The consumer price index (CPI) ❖ The producer price index (PPI) ❖ The consumer price index is a measure of the average change over time in the prices a typical urban family of four pays for the goods and services they purchase. To calculate the CPI in a given year, we need:
- A basket of goods
- The cost to purchase the basket of goods in a base year
- The prices in the current year The CPI in the current year is the cost to purchase the basket of goods this year, divided by the cost in the base year. By convention, we multiply this by 100, so that the CPI in the base year is 100.
Is the CPI an Accurate Measure of Inflation?
Some potential problems with the CPI include:
- Substitution bias: Consumers may change their purchasing habits away from goods that have increased in price.
- Increase in quality bias: Products like cars and computers have become more durable and better quality over time. It is hard to isolate the pure-inflation part of price increases.
- New product bias: The basket of goods changes only every 10 years. There is a delay to including new goods like cell phones.
- Outlet bias: Increases in purchases from discount stores like Sam’s Club and Costco or the internet are not incorporated into the CPI; it still uses full-retail price.
5 - Deflation:
- Deflation is generally the decline in the prices for goods and services that occur when the rate of inflation falls below 0%.
- Deflation will take place naturally, when the money supply of an economy is limited. Deflation in an economy indicates deteriorating conditions.
- Deflation is normally linked with significant unemployment and low productivity levels of goods and services.
- The term “Deflation” is often mistaken with “disinflation.” While deflation refers to a decrease in the prices of goods and services in an economy, disinflation is when inflation increases at a slower rate.
Causes of Deflation
1 - Structural changes in capital markets :
- When different companies selling similar goods or services compete, there is a tendency to lower prices to have an edge over the competition. 2 - Increased productivity :
- Innovation and technology enable increased production efficiency which leads to lower prices of goods and services.
- Some innovations affect the productivity of certain industries and impact the entire economy. 3 - Decrease in the supply of currency :
- The decrease in the supply of currency will decrease the prices of goods and services to make them affordable to people.
6 - Is inflation considered good for the economy of the country?
- Inflation is viewed as positive when it helps boost consumption and consumer demand, driving economic growth. Some believe inflation is meant to keep deflation in check, while others think inflation is a drag on the economy.
- When the economy is not running at capacity, i.e., there is unused labour or resources, inflation theoretically helps increase production. It also makes it easier for debtors, who can repay their loans with money that is less valuable than the money they borrowed.
Unemployment
Objective of unemployment
1 - Definition
2 - Types of unemployment
3 - Causes of unemployment
4 - Costs of unemployment
5 - Measurement
6 - Solutions
7 - The Phillips Curve
1 - Definition of unemployment
- Unemployment refers to a situation in which the workers who are capable of working and willing to work do not get employment.
- The term unemployment refers to a situation when a person who is actively is unable to find work. Unemployment is considered to be a key measure of the health of the economy. The most frequent measure of unemployment is the unemployment rate, which is the number of unemployed people divided by the number of people in the labor force.
- Many governments offer unemployment insurance to certain unemployed individuals who meet eligibility requirements.
2 - Types of unemployment
1 - Frictional unemployment 2 - Structural unemployment 3 - Cyclical or Keynesian unemployment 4 - Seasonal unemployment
1. Frictional unemployment
occurs when a worker moves from one job to another. It is a result of imperfect information in the labor market, because if job seekers knew that they would be employed for a particular job vacancy, almost no time would be lost in getting a new job, eliminating this form of unemployment. An example is a worker who recently quit or was fired and is looking for a job in an economy that is not experiencing a recession. Frictional unemployment: Short-term unemployment that arises from the process of matching workers with jobs. Frictional unemployment occurs mostly because of job search: entering or reentering the labor force, or being between jobs. It also occurs because of seasonal unemployment: some jobs fluctuate in availability due to seasonal demand, like ski-instructor or farm-work. Some frictional unemployment increases economic efficiency by allowing for better job matches.
2. Structural unemployment
Structural unemployment arises when the qualification of a person is not enough to meet his job responsibilities. Structural unemployment arises when the salary offered to a person falls short of the minimum wage that can be paid for the concerned job. Structural unemployment happens when the skills set of a worker does not match the skills demanded by the jobs available, or alternatively when workers are available but are unable to reach the geographical location of the jobs. Structural unemployment is associated with longer unemployment spells. Workers who are structurally unemployed may require retraining in order to obtain “modern” jobs.
3. Cyclical unemployment
Cyclical or demand deficient unemployment occurs when the economy needs low workforce. The demand for labor increases with the economy in the growth phase. Again, when the economy passes through depression, demand for labor decreases and the extra workers are released as the unemployed labor force. In normal recoveries after a recession, unemployment due to cyclical factors will fall.
4. seasonal unemployment
Seasonal unemployment occurs when an occupation is not in demand at certain seasons.
3 - Causes of unemployment
1 - High Population growth. 2 - Absence of employment opportunities. 3 - Seasonal Employment. 4 - Joint Family System. 5 - Slow Developing of Industries. 6 - Insufficient Rate of Economic Progress.
Unemployment
Consolation about causes of unemployment:
When all unemployment is due to frictional and structural factors, we say that the economy is at full employment. This means there will always be some unemployment in the economy.
- Economists call this the natural rate of unemployment: The normal rate of unemployment, consisting of frictional unemployment and structural unemployment.
- The general consensus of economists is that the U.S. natural rate of unemployment is somewhere between 5 and 6 percent.
4 - Costs of unemployment
➢ Individual: o Unemployed individuals are unable to earn money to meet financial needs. Failure to pay installments or to pay rent may lead to homelessness through eviction. o Unemployment increases chances of malnutrition, illness, mental stress, and loss of self- esteem, leading to depression. ➢ Society: o An economy with high unemployment is not using all of the resources, i.e. labor, available to it. Since it is operating below its production capability, it could have higher output if more people are usefully employed. o However, there is a difference between economic efficiency and unemployment: if the frictionally unemployed accepted the first job they were offered, they would be likely to be operating at below their skill level, reducing the economy's efficiency.
5 - Measuring Unemployment
- There are more than 300 million people in the United States, and monitoring and reporting on their activities regularly would be very difficult and costly.
- Instead, the U.S. Department of Labor reports estimates of employment, unemployment, and other statistics related to the labor force each month. o Labor force: The sum of employed and unemployed workers in the economy. o Of these statistics, the most watched is known as the unemployment rate: the percentage of the labor force that is unemployed. People are then classified as:
- Employed: Worked 1+ hours in reference week (or were temporarily away from their jobs).
- Unemployed : Someone who is not currently at work but who is available for work and who has actively looked for work during the previous month
- Not in the labor force, if neither of the above apply Working-Age Population Discouraged workers: People who are available for work, but have not looked for a job during the previous four weeks because they believe no jobs are available for them.
Unemployment
Test bank
1. if people are made unemployment because of a fall in aggregate demand this is known as ……. a) Frictional unemployment b) Seasonal unemployment c) Cyclical unemployment d) Structural unemployment 2. The natural rate of unemployment is likely to fall if: a) Unemployment benefits increase b) Income tax increase c) More training is available for the unemployed d) Geographical immobility increase 3. If the real wage is above the equilibrium level in the labour market: a) The quantity demanded of labour is higher than the quantity supplied b) The quantity demanded of labour equals the quantity supplied c) The quantity demanded of labour is lower than the quantity supplied d) The real wage will automatically rise in the short run to bring about equilibrium 4. If there is cyclical unemployment in the economy the government might: a) Increase interest rates b) Encourage saving c) Cut income tax d) Reduce government spending 5. Types of unemployment ………. a) 4 types b) 3 types c) 5 types 6. Frictional unemployment occurs when: a) The works moves between jobs b) In some seasons c) After graduate to find job d) A & C 7. While workers skills do not match what jobs are available for the current economy is …… a) Structural unemployment b) Cyclical unemployment c) Frictional unemployment d) Seasonal unemployment 8. Causes of structural unemployment is: a) Changes in consumer demand b) Lack of education c) New technology d) Globalization e) All of the above 9. If there are 5.5 million unemployed people. And there are 95 million people in the civilian labor force, we have rate of unemployment is: a) 8.5% b) 5.8% c) 6.2% d) 3.5% 10. Solutions of unemployment problem: a) A change in the pattern of investment b) Encouragement to small enterprise as against big enterprises c) Problem of choice of technology d) All of the above 11. Causes of unemployment are: a) High population growth b) Increasing turnout of students from universities c) Slow developing of industries d) Inefficient rate of economic progress e) All of the above 12. Unemployment rate of about is normal during full employed a) 8:9 percent b) 5:6 percent c) 6:8 percent d) 7:8 percent
poverty
Chapter objective
1 - What Is Poverty?
2 - What Is Poverty Line?
3 - Causes Of Poverty
4 - The poverty cycle
5 - Effects Of Poverty
6 - Two Ways Of Poverty
7 - Types of poverty
8 - Measurement Of Poverty
9 - Measures to Reduce Poverty
10 - Government Programmers For Poverty Alleviation
1. Definition of poverty:
- Poverty is the deprivation of food, shelter, money and clothing when people can’t satisfy their basic needs.
- Poverty can be understood simply as a lack of money or more broadly in terms of barriers to everyday human life.
- Poverty is the other economic problem facing most of the nations in the world. There is no unique definition of poverty.
- Numerical poverty index compared to the poverty line $ 1.90 per day per person (2011 purchasing power parity) (% of the population). ➢ The world bank describes poverty as:“Poverty is hunger. Poverty is lack of shelter. Poverty is being sick and not Being able to see a doctor. Poverty is not having access to School and not knowing how to read. Poverty is not Having a job, is fear for the future, living one dav at a time.”
2. What Is Poverty Line?
o Poverty Line is drawn based on Expenditure that is necessary to Secure the Minimum Acceptable Living Standard for Work & Efficiency. o Since, Food is the most Basic Requirement, thus, Poverty Line is drawn on the basis of a Minimum Necessary Nutritional Standard expressed in terms of Calories Per Day.
3. Causes of poverty
There are many theories theorists had came up with to the cause of poverty. Some theorists have accused the poor of having little concern for the future and preferring to others have accused them of engaging in self-defeating behavior Still, other theorists have characterized the poor as fatalists, resigning themselves to a culture of poverty in which nothing can be done to change their economic outcomes. In this culture of poverty-which passes from generation to Generation-the poor feel negative, inferior, passive, hopeless, and Powerless. Causes of poverty 1 - INADEQUATE ACCESS TO CLEAN WATER AND NUTRITIOUS FOOD 2 - LITTLE OR NO ACCESS TO LIVELIHOODS OR JOBS 3 - CONFLICT 4 - INEQUALITY 5 - POOR EDUCATION 6 - CLIMATE CHANGE 7 - LACK OF INFRASTRUCTURE 8 - LIMITED CAPACITY OF THE GOVERNMENT 9 - LACK OF RESERVES
4. The poverty cycle
o The cycle of poverty has been defined as a phenomenon where poor families become trapped in poverty for at least three generations. o In calculations of expected generation length and ancestor lifespan, the lower median age of parents in these families is offset by the shorter lifespans in many of these groups. o Such families have either limited or no resources. There are many disadvantages that collectively work in a circular process making it virtually impossible for individuals to break the cycle.
poverty
2) Absolute Poverty
o It is associated with a Minimum Level of Living or Minimum Consumption Requirements for Food, Clothing, Housing, Health, etc. o All those People who fail to Secure Income or Assets to have access to even these Minimum Consumption Requirements are classified as ‘Poor’. o Is relevant for the Less-Developed Countries. o It was first introduced in 1990, the “dollar a day” poverty line measured absolute poverty by the standards of the world’s poorest countries. o In October 2015, the World Bank reset it to $1.90 a day.This number is controversial; therefore each nation has its own threshold for absolute poverty line.
7. Types of poverty
1 - Situational Poverty. 2 - Generational Poverty. 3 - Rural Poverty. 4 - Urban Poverty.
1 - Situational Poverty:
It is a temporary type of poverty based on occurrence of an adverse event like environmental disaster, job loss and severe health problem. People can help themselves even with a small assistance, as the poverty comes because of unfortunate event.
2 - Generational Poverty:
It is handed over to individual and families from one generation to the one. This is more complicated as there is no escape because the people are trapped in its cause and unable to access the tools required to get out of it. Occurs in families where at least two generations have been born into poverty. Families living in this type of poverty are not equipped with the tools to move out of their situation
3 - Rural Poverty:
It occurs in rural areas with population below 50,000. It is the area where there are a. less job opportunities b. less access to services c. less support for disabilities and quality education opportunities. d. People are tending to live mostly on the farming and other menial work available to the surroundings. The rural poverty rate is growing and has exceeded the urban rate every year since data collection began in the 1960s. The difference between the two poverty rates has averaged about 5 percent for the last 30 years, with urban rates near 10- 15 percent and rural rates near 15- 20 percent
4 - Urban Poverty:
It occurs in the metropolitan areas with population over 50,000. These are some major challenges faced by the Urban Poor: 1 - Limited access to health and education. 2 - Inadequate housing and services. 3 - Violent and unhealthy environment because of overcrowding. 4 - Little or no social protection mechanism.
8. Measurement Of Poverty
➢ Income poverty measurements generally use the physiological deprivation model to assess lack of access to economic resources (income) to satisfy basic material needs. ➢ Income inequality is measured by five indicators, such as the Gini coefficient ➢ Poverty rate: The poverty rate is the ratio of the number of people (in each age group) whose income falls below the poverty line; taken as half the median household income of the total population. ➢ Measures income distribution across a population. it often serves as A. a gauge of economic inequality B. measuring income distribution C. wealth distribution among a population. ➢ The coefficient ranges from 0 (or 0%) to 1 (or 100%) 1 - with 0 representing perfect equality 2 - 1 represents perfect inequality. 3 - Values over 1 are theoretically possible due to negative income or wealth.
poverty
➢ Understanding the Gini Index
- Gini index is calculated as the ratio of the area between the perfect equality line and the Lorenz curve (A) divided by the total area under the perfect equality line (A+B) ➢ A country in which every resident has the same income would have an income Gini coefficient of 0. ➢ Conversely, a country in which one resident earned all the income, while everyone else earned nothing, would have an income Gini coefficient of 1.
9. Graphical Representation of the Gini Index
❖ Lorenz curve
- The Lorenz curve is a graphical representation of the cumulative distribution function of the empirical probability distribution of wealth. - It is a graph showing the proportion of the distribution assumed by the bottom y% of the values. - It is often used to represent income distribution, where it shows for the bottom x% of households, what percentage y% of the total income they have.The percentage of households is plotted on the x-axis, the percentage of income on the y-axis. - It can also be used to show distribution of assets. In such use, many economists consider it to be a measure of social inequality. It was developed by Max O. Lorenz in 1905 for representing inequality of the wealth distribution. - However, it may also be used to show inequality in other systems. The Gini index can be calculated from a Lorenz curve by taking the integral of the curve and subtracting from 0.5.
10. suggestion to solve the poverty problem
➢ Millennium Development goals (MDGs) Eight goals adopted by the United Nations in 2000
Trade cycle
OBJECTIVE OF CHAPTER
1 - Meaning and Definition of Trade Cycle.
2 - Nature of Trade Cycle.
3 - Causes of Trade Cycle.
4 - Effects of business cycle
5 - Measures To Control Trade Cycle
1. MEANING OF TRADE CYCLE
➢ The trade cycle refers to the ups and downs in the level of economic activity which extends over a period of several years. ➢ If we examine the past statistical record of the business conditions, we will find that business has never run smoothly for ever. ➢ There are many fluctuations in the period. Some times prosperity is followed by adversely. In Economics this tendency of the business activities, to fluctuate from prosperity to adversely is called business cycle.
DEFINITION OF TRADE CYCLE
A trade cycle is composed of periods of bad trade characterized by falling prices and high unemployment percentages while a period of good trade is characterized by rising prices and high employment.
2. NATURE OF TRADE CYCLE:
1 - BOOM/ PEAK
Peak or prosperity phase: 1 - Real output in the economy is at a high level 2 - Unemployment is low 3 - Domestic output may be at its capacity
4 - Inflation may be high
2 - RECESSION
Contraction or recession phase: 1 - Real output is decreasing 2 - Unemployment rate is rising. 3 - As contraction continues, inflation decrease. 4 - If the recession for long time, price may decline (deflation) 5 - The government determinant for a recession is two consecutive quarters of declining output.
3 - DEPRESSION
depression phase: 1 - Lowest point of real GDP 2 - Output and unemployment “bottom out” 3 - This phase may be short-lived or prolonged 4 - There is no precise decline in output at which a serious recession becomes a depression.
4 - EXPANSION (RECOVERY)
Expansionary or recovery: 1 - Real output in the economy is increasing. 2 - Unemployment rate is declining. 3 - The upswing part of the cycle.
3. CAUSES OF BUSINESS CYCLE
Main causes of the cycle 1 - Changes in Demand 2 - Fluctuations in Investments 3 - Macroeconomic Policies 4 - supply of money External Causes of Business Cycles 1 - Wars 2 - Technology Shocks 3 - Natural Factors 4 - Population Expansion
Trade cycle
1] CHANGES IN DEMAND
Keynes economists believe that a change in demand causes a change in the economic activities. When the demand in an economy increases the firms start producing more goods to meet the demand. There is more output, more employment, more income, and higher profits. This will lead to a boom in the economy. But excessive demand may also cause inflation. On the other hand, if the demand falls, so does the economic activity. This may lead to a bust, which if it continues for a longer period of time may even lead to depression in the economy.
2] FLUCTUATIONS IN INVESTMENTS
Just as fluctuations in demand, fluctuations in investment is one of the main causes of business cycles. The investments will fluctuate on the basis of a lot of factors such as the rate of interest in the economy, entrepreneurial interest, profit expectation, etc. An increase in investment will lead to an increase in economic activities and cause expansion. A decrease in investment will have the opposite effect and may cause a trough or even depression.
3] MACROECONOMIC POLICIES
The monetary policies and the economic policies of a nation will also result in changes in the phases of a business cycle. So if the monetary policies are looking to expand economic activities by promoting investment, then the economy booms. On the other hand, if there is an increase in taxes or interest rates we will see a slowdown or a recession in the economy.
4] SUPPLY OF MONEY
There is another belief that says that business cycles are purely monetary phenomena. So changes in the money supply will bring about the trade cycles. An increase of money in the market will cause growth and expansion. But too much money supply may also cause inflation which is adverse. And the decrease in the supply of money will cause a recession in the economy.
EXTERNAL CAUSES OF BUSINESS CYCLES
1] WARS
o During times of wars and unrest, the economic resources are put to use to make special goods like weapons, arms, and other such war goods. o The focus shifts from consumer products and capital goods. This will lead to a fall in income, employment, and economic activity. So the economy will face a downturn during war times. o And later post-war the focus will be on rebuilding. Infrastructure needs to be reconstructed (houses, roads, bridges, etc). o This will help the economy pick up again as progress is being made. Economic activity will increase as effective demand will increase.
2] TECHNOLOGY SHOCKS
o Some exciting and new technology is always a boost to the economy. o New technology will mean new investment, increased employment, and higher incomes and profits. o For example, the invention of the modern mobile phone was the reason for a huge boost in the telecom industry.
3] Natural Factors
o Natural disasters can cause damage to the crops and huge losses to the agricultural sector. o Shortage of food will cause increase in prices and high inflation. o Capital goods may see a reduction in demand as well.
4 ] Population Expansion
o If the population growth is out of control that might be a problem for the economy. o Basically of the population growth is higher than the economic growth the total savings of an economy will start decrease. o Then the investments will reduce as well and the economy will face depression or a slow down.
4. EFFECTS OF BUSINESS CYCLE:
A- EFFECTS OF BUSINESS CYCLES DURING EXPANSION
1 - High growth : large investments, increase in employment, income and expenditure 2 - Inflation: Increase in investment forces more money supply in the system, demand for factor inputs increases, hence their prices increase which increases cost of production. So wages and prices of goods also increase. 3 - Severe Competition: Firms resort to large amount of non productive expenditure on advertisements and publicity.
Trade cycle
E- REORGANIZATION OF ECONOMIC SYSTEM
o Some economists suggest that there should be complete reorganization of the whole economic system to control of business cycle fluctuation. o The capitalistic system of production should be replaced by the socialistic system of production. o In socialistic economy, there are few chances of cyclic fluctuations. o In 1930, when all capitalist countries of the world were suffering from depression, it was only socialist countries which were free from such crisis.
Test bank
1 - Macroeconomics distinguishes between the real economy and the ... a) monetary economy. b) virtual economy. c) normative economy. d) underground economy. 2 - During business cycles the opposite of a trough is... a) an inflation b) a hyperinflation. c) a trend. d) a peak 3 - According to the analysis of the British economist Keynes a) markets coordinate supply and demand so that a policy of laissez-faire would prevent recessions. b) economic fluctuations were the cumulative result of mistakes made by businesses and households in an uncertain world. c) government demand could be used to smooth fluctuations in aggregate output and income. d) supply creates its own demand through the circular flow of economic activity 4 - In order to influence spending on goods and services in the short-run, monetary policy is directed at directly influencing... a) unemployment rates. b) inflation rates. c) interest rates. d) economic growth rates. 5 - unemployment is low and Inflation may be high in : a) PEAK b) RECESSION c) DEPRESSION d) RECOVERY 6 - An important indicator of a nation's well-being is... a) gross domestic product (GDP) b) gross national product (GNP) c) gross national income (GNI) d) the growth rate of GDP or GNP
True or false
7 - trade cycle refers to the ups and downs in the level of economic activity which extends over a period of several years. 8 - Real output in the economy is at a high level in peak level. 9 - the price may decline in peak level of trade cycle. 10 - Lowest point of real GDP in DEPRESSION. 11 - A trade cycle is composed of periods of good trade characterized by falling prices and high unemployment percentages. 12 - peak is characterized by low Unemployment and low inflation. 13 - Effects of business cycles during recession are high growth, inflation, severe competition. 14 - Effects of business cycles during recession are Excess inventory, Unemployment,Below capacity operations and liquidation of firms. 15 - Causes of business cycle are changes in demand, supply of money, technology shocks wars, and population expansion. 16 - New technology will mean new investment, increased employment, and higher incomes and profits. 17 - More output, more employment, more income, and higher profits lead to a boom in the economy. 18 - Fluctuations in demand, or Fluctuations in Investment is not one of the main causes of the business cycle. 19 - Natural disasters can cause damage to crops and huge losses to the agricultural sector. 20 - Some economists have suggested that if a government takes control of private investment is a tool to control of business cycle fluctuations that can be controlled within the limits. 21 - An increase in investment will lead to an increase in economic activities and causes depression. 22 - Every country has trade relations with the rest of the world. If there is inflation or deflation in one country, it can be easily carried to other countries. 23 - A decrease in money in the market will cause growth and expansion. 24 - An increase in taxes or interest rates leads to a slowdown or recession in the economy. 25 - In case of inflation the growth of the total savings of an economy will start to increase. 26 - Basically if the population growth is higher than the economic growth the total savings of an economy will start to increase. 27 - Monetary policy is not considered as a measure of controlling business cycle fluctuation. 28 - Fiscal policy is a powerful anti-cycle weapon in the hands of the government that involves the process of shaping the public finance. 29 - The bank can adopt different measures for this purpose, like increase in the bank rate , selling of securities in the market , increasing the reserve ratio of the member banks.
Financial crisis
Objectives
Financial Crises and the Subprime Meltdown
1 - Factors Causing Financial Crises
2 - Dynamics of past U.S. Financial Crises
3 - The Subprime Financial Crisis of 2007 – 2008
1. Factors Causing Financial Crises
1 - Asset Markets Effects on Balance Sheets
A- Stock market decline (Decreases net worth of corporations). B- Unanticipated decline in the price level (Liabilities increase in real terms and net worth decreases). C- Unanticipated decline in the value of the domestic currency (Increases debt denominated in foreign currencies and decreases net worth). D- Asset write-downs.
2 - Deterioration in Financial Institutions’ Balance Sheets
3. Banking Crisis
- Loss of information production and disintermediation.
4. Increases in Uncertainty
5. Increases in Interest Rates
A- Increases adverse selection problem B- Increases need for external funds and therefore adverse selection and moral hazard.
6. Government Fiscal Imbalances
A- Create fears of default on government debt. B- Investors might pull their money out of the country.
2. Dynamics of past U.S. Financial Crises
1 - Stage One: Initiation of Financial Crisis
- Mismanagement of financial liberalization/innovation - Asset price boom and bust - Spikes in interest rates - Increase in uncertainty 2 - Stage two: Banking Crisis 3 - Stage three: Debt Deflation
3. The Subprime Financial Crisis of 2007 – 2008
Dynamics of Financial Crises in Emerging Market Economies
➢ Stage one: Initiation of Financial Crisis.
Path one: mismanagement of financial liberalization/globalization:
- Weak supervision and lack of expertise leads to a lending boom. - Domestic banks borrow from foreign banks. - Fixed exchange rates give a sense of lower risk. - Banks play a more important role in emerging market economies, since securities markets are not well developed yet. Path two: severe fiscal imbalances: - Governments in need of funds sometimes force banks to buy government debt. - When government debt loses value, banks lose and their net worth decreases. Additional factors: - Increase in interest rates (from abroad) - Asset price decrease - Uncertainty linked to unstable political systems
