Macroeconomics is focused on the movement and trends in the economy as a whole, while in microeconomics the focus is placed on factors that affect the decisions made by firms and individuals. The factors that are studied by macro and micro will often influence each other, such as the current level of unemployment in the economy as a whole will affect the supply of workers which an oil company can hire from.
Discuss the cost of inflation and the dangers of deflation In economics, inflation is a persistent increase in the general price level of goods and services in an economy over a period of time. When the general price level rises, each unit of currency buys fewer goods and services. Consequently, inflation reflects a reduction in the purchasing power per unit of money – a loss of real value in the medium of exchange and unit of account within the economy. A chief measure of price inflation is the inflation rate, the annulled percentage change in a general price index over time.
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Inflation’s effects on an economy are various and can be simultaneously positive and negative. Negative effects of inflation include an increase in the opportunity cost of holding money, uncertainty over future inflation which may discourage investment and savings, and if inflation is rapid enough, shortages of goods as consumers begin hoarding out of concern that prices will increase in the future. Positive effects include ensuring that central banks can adjust real interest rates and encouraging investment in non-monetary capital projects. Low inflation is the main macroeconomic goal for most western countries.
This is because there are many economic costs of high inflation. Cost of Reducing Inflation High inflation is deemed unacceptable therefore governments feel it is best to reduce it. This will involve greater interest rates to reduce spending and investment. This reduction in Aggregate Demand will lead to a decline in economic growth and unemployment. International competitiveness A relatively higher inflation rate will make British goods less competitive, leading to a fall in exports. However this may be offset by a decline in the exchange rate.
But, if a country is in the Euro they can not devalue. Therefore, high inflation can be very damaging as it leads to a decline in competitiveness. Confusion and Uncertainty When inflation is high people are uncertain what to spend their money on. When inflation is high firms may be less willing to invest because they are uncertain about future profits and costs. This uncertainty and confusion can lead to lower rates of economic growth over the long term. Shoe leather costs Saving on losing interest in a bank people will hold less cash and make more trips to the bank.
Income redistribution Inflation will typically make borrowers better off and lenders worse off. Inflation reduces the value of savings, especially if the saving is not index linked. However it does depends on the real rate of interest. . G. If a saver gets a higher rate of interest than the inflation rate he will not lose out. Menu Costs This is the cost of changing price lists. When inflation is high, prices need changing frequently which incurs a cost. However, modern technology has helped to reduce this cost.
Boom and Bust Economic Cycles High inflationary growth is unsustainable and is usually followed by a recession. By keeping inflation low it enables a long period of economic growth. E. G. In the I-J, low inflation helped economic growth to be more stable in the period 1992-2007. Sustainable, low inflationary, economic growth is highly desirable. Fiscal Drag The amount of tax we pay will increase if there is inflation. This is because with rising wages more people will slip into the top income tax brackets. Low inflation is often seen as harmless or even beneficial because it allows prices to adjust more easily.
Deflation is a general decline in prices, often caused by a reduction in the supply of money or credit. Deflation can be caused also by a decrease in government, personal or investment spending. The opposite of inflation, deflation has the side effect of increased unemployment since there is a lower level of demand in the economy, which can lead to an economic depression. Central banks attempt to stop severe deflation, along with severe inflation, in an attempt to keep the excessive drop in prices to a minimum. The decline in prices of assets is often known as Asset Deflation.
There are some basic lists of dangers of deflation. Consumers postpone consumption Buying slow and cause the economy slows further. Wages are “sticky” downward Meaning wages typically do not fall even if their real value has risen. When prices fall and wages are sticky downward, firms lay off more workers and/or hire fewer workers. This leads to rising unemployment. The unemployed, and those fearful of becoming unemployed, spend less. Hence the economy slows further. Borrowers face a bigger burden They must pay same amount of dollars each month, but those dollars are now worth more.
They may cut back on other spending to meet their debt obligations. Hence the economy slows further. Discuss the nature and the roles of money Money is any object or record that is generally accepted as payment for goods and services and repayment to debts in a given socio-economic context or country. The main functions of money are distinguished as: a medium of exchange; a unit of count; a store of value; and, occasionally in the past, a standard of deferred payment. Any kind of object or secure verifiable record that fulfills these functions can be considered money.
Money is historically an emergent market phenomenon establishing commodity money, but nearly all contemporary money systems are based on fiat money. Such laws in practice cause fiat money to acquire the value of any of the goods and services that it may be traded for within the nation that issues it. In a capitalistic economy, money is the pivot around which all economic activities cluster. Money is an indicator as well as a surveyor of wealth. Production Decisions Production has been greatly facilitated by the introduction of money. Money makes possible the accumulation of wealth in those hands which are able to organize the production.
The captain of the industry hires the various factors ‘ of production in order to meet the future demand for goods and services and pays them in terms of money If the reward was to be paid in commodity, then the exchange of goods would have been very limited and so the production on a small scale production without the use of money cannot be organized on a large scale and run efficiently and economically. The cost of production is also estimated in terms of money. The profit or loss which is the difference between the sales proceeds and the total money cost is also expressed in terms of money.
The consumption can be easily postponed and the assets can be stored for use to a future date. Exchange Transactions In a moneyless economy, exchange of goods was a very inconvenient process. People used to face the difficulties of double coincidence of wants. There was also no common measure of value. Money, by acting as a medium of exchange, has greatly stimulated the exchange of goods. It splits up exchange process into two parts, sale and purchase and thus facilitates flow of goods and services from producers to consumers. Money in the Field of Public Finance Money renders a very valuable service in the field of public finance.
Public Finance in recent times aims at increasing the rate of economic activities and reducing inequalities of income. It also acts as an instrument of economic and social Justice in a country. Money helps the state in the achievement of these objectives. The government can easily raise revenue through the medium of money and can spend it or the betterment of the people. Attainment of High Level of Production and Employment The introduction of money in the economy has facilitated exchange. It has led to high degree of specialization and interdependence of economic units.
If the money is properly managed, it ensures rising level of productions employment and real income in the country. In case, the delicate instruments is not properly handled, it leads to decline in the prices, output and Job opportunities. 5. 0 not required to hold in reserve. Banks basically make money by lending money at rates higher than the cost of the money they lend. More specifically, banks collect interest on loans and interest payments from the debt securities they own, and pay interest on deposits, CDC, and short-term borrowings.
The difference is known as the “spread,” or the net interest income, and when that net interest income is d v De by the bank’s earning assets; it is known as the net interest margin. Deposits The largest source by far of funds for banks is deposits; money that account holders entrust to the bank for safekeeping and use in future transactions, as well as modest amounts of interest. Generally referred to as “core deposits,” these are typically the heckling and savings accounts that so many people currently have. In most cases, these deposits have very short terms.
While people will typically maintain accounts for years at a time with a particular bank, the customer reserves the right to withdraw the full amount at any time. Many banks pay no interest at all on checking account balances, or at least pay very little, and pay interest rates for savings accounts that are well below U. S. Treasury bond rates. Wholesale Deposits If a bank cannot attract a sufficient level of core deposits, that bank can turn to wholesale sources of funds. In many respects these wholesale funds are much like interbrain CDC.
There is nothing necessarily wrong with wholesale funds, but investors should consider what it says about a bank when it relies on this funding source. While some banks De-emphasize the branch-based deposit-gathering model, in favor of wholesale funding, heavy reliance on this source of capital can be a warning that a bank is not as competitive as its peers. Investors should also note that the higher cost of wholesale funding means that a bank either has to settle for a narrower interest spread, and lower profits, or pursue higher yields from its lending ND investing, which usually means taking on greater risk.
Share Equity Shareholder equity is an important part of a bank’s capital. Several important regulatory ratios are based upon the amount of shareholder capital a bank has and shareholder capital is, in many cases, the only capital that a bank knows will not disappear. Common equity is straight forward. This is capital that the bank has raised by selling shares to outside investors. While banks, especially larger banks, do often pay dividends on their common shares, there is no requirement for them to do so. Banks often issue preferred shares to raise capital. Debt Banks will also raise capital through debt issuance.
Banks most often use debt to smooth out the ups and downs in their funding needs, and will call upon sources like repurchase agreements to access debt funding on a short term basis. There is frankly nothing particularly unusual about bank-issued debt, and like regular corporations, bank bonds may be callable or convertible. Although debt is relatively common on bank balance sheets, it is not a critical source of capital for most banks. How hyperinflation are caused by governments resorting to seignior’s. Hyperinflation is extremely rapid or out of control inflation. There is no precise numerical definition to hyperinflation.
Hyperinflation is a situation where the price increases are so out of control that the concept of inflation is meaningless. When associated with depressions, hyperinflation often occurs when there is a large increase in the money supply not supported by gross domestic product (GAP) growth, resulting in an imbalance in the supply and demand for the money. Left unchecked this causes prices to increase, as the currency loses its value. When associated with wars, hyperinflation often occurs when there is a loss of confidence in a currency’s ability to maintain its value in the aftermath.
Because of this, sellers demand a risk premium to accept the currency, and they do this by raising their prices. Hyperinflation owes its emergence to the certain basic factors. The primary reason for the emergence of Hyperinflation in an economy is a huge disparity existing between demand and supply of a specific type of money. Such disparities normally arise when very little confidence is left on that particular currency, parallel to a bank run. Ratification of laws associated with legitimate tenders puts a check on reducing he value of paper notes, with regard to hard money, silver or gold.
This is materialized, by initiating forceful acceptance of paper notes, which hardly have any fundamental value. In case, the currency printing entity supports surplus printing, there are chances of Hyperinflation to affect the economy. Excess printing of paper currency is considered to be one of the principal causes of Hyperinflation. This is simply because printing of paper notes is much easier than other forms of currency. The process of escalating the supply of money through paper notes is an easy one. All one needs to do is to add large number of zeros to the plates and then print, or stamp fresh numbers on the old paper currencies.
In fact, most cases of Hyperinflation are known to have reverted back to hard currency. Hyperinflation may as well affect the economy of a country, due to lack of central banks. Owing to lack of central banks, the process of “independent banking” goes on within the country full- fledged. This kind of banking is curbed by the government by permitting a handful of banks to postpone their convertibility, on the ground of violating both the hard-core ND absolute contracts and promises made by them to the government.
However, such instances of Hyperinflation create a frightening effect on the overall banking sector of a country, leading to a fall in the supply of the available money. It is these factors which contribute towards economic pressures, and finally Deflation. Economical distortions and virtual demolition of the purchasing powers of public and private savings is caused by Hyperinflation. The disruption of the economic condition of a nation exerts direct effect on its financial bases, causing both hard or specie currency to desert the country. This creates immense negative impact on the investments.
Seignior (also spelled seignior’s or seigneur) is the difference between the value of money and the cost to produce and distribute it. Seignior derived from specie??metal coins??is a tax, added to the total price of a coin (metal content and production costs), that a customer of the mint had to pay to the mint, and that was sent to the sovereign of the political area. Seignior derived from notes is more indirect, being the deterrence between interest earned on securities acquired in exchange for bank notes and the costs of producing and distributing those notes.
Seignior is a convenient source of revenue for some governments. Inflation tax is a term which refers to the financial loss of value suffered by holders of cash and fixed-rate bonds, as well those on fixed income due to the effects of inflation; or capital gains tax resulting from inflation. This financial loss of value is often expressed as a loss of purchasing power. It may be better characterized as a wealth transfer than a tax – since many people including debtors, holders of hard assets and some equities may simultaneously gain.
Many economists hold that inflation affects he lower and middle classes more than the rich, as they hold a larger fraction of their income in cash, they are much less likely to receive the newly created monies before the market has adjusted with inflated prices, more often have fixed incomes, wages or pensions, and lack the means to avoid domestic inflation by reallocating assets overseas. Macroeconomics is a branch of economics dealing with the performance, structure, behavior, and decision-making of an economy as a whole, rather than individual markets. This includes national, regional, and global economies.
With microeconomics, macroeconomics is one of the two most general fields in economics. Macroeconomics study aggregated indicators such as GAP, unemployment rates, and price indices to understand how the whole economy functions. Macroeconomics develop models that explain the relationship between such factors as national income, output, consumption, unemployment, inflation, savings, investment, international trade and international finance. In contrast, microeconomics is primarily focused on the actions of individual agents, such as firms and consumers, and how their behavior determines prices and quantities in specific markets.