The Pros And Cons Of Macroeconomics

Since the Central Bank has the exclusive right to issue money in the economy, it can have extensive influence on the determination of interest rate in financial markets and in the economy as a whole, by adjusting the interest rate on short-term loans to financial institutions. Central Bank interest rates on these loans therefore have the most immediate impact on other short-term interest rates in the money market. By influencing interest rates, monetary policy then has an effect on the savings and expenditure decisions of individuals and corporate.

Also known as Cash Reserve Ratio, it is the percentage of deposits which commercial banks are required to keep as cash according to the directions of the central bank. (Times) . When a bank is left with excess reserves they can do a federal refund and lend money to other banks that might be running low on reserves. The reserve ratio is applied when the bank is low on the amount of reserves it has, at this time the bank is than forced to reduce checkable deposits while reducing its money supply. In some cases is also may need to increase its reserves. The bank can increase its reserves by selling bonds, which would also lower the money supply in the

For centuries, banks have relied on fractional reserve banking. This is the method in which only a fraction of a bank’s deposits are actually backed by a reserve of cash-on-hand, available for immediate withdrawal. This procedure allows the bank more capital to lend and at the same time, grows the economy. The reserve amounts are determined by a ratio stipulated by the Federal Reserve. In theory, fractional reserve banking works most of the time. However, in difficult economic times, people have demanded to withdraw

John Maynard Keynes was born in 5th of June 1883 and died at the age of 62 on the 21st of April 1946. His work in economics and his ideas fundamentally changed the practice and theory of modern macroeconomics as well as the economic policies of governments. Keynes is very well known for his exceptional work on the implications and causes of the business cycles and is also regarded as the founder of modern macroeconomics. The school of thought also known as ‘Keynesian economics’ as well as the various offshoots have his ideas as foundation.

1. If an economy produces final output worth $5 trillion, then the amount of gross

Microeconomics and macroeconomics concepts aide in the understanding on how they affect the shifts of supply and demand affect equilibrium price and quantity. Microeconomics focuses on supply and demand (Colander, 2010). A company would look at ways to increase production that could decrease their prices compared to competitors. This would adjust the equilibrium price of products by increasing the quantity that is available. This would allow the company the ability to pass price savings to consumers. Macroeconomics is used as the economy changes such as with inflation (Colander, 2010). Inflation would cause a company to have increase cost of materials in producing their product. This creates a change in quantity to be provided as supply has to be adjusted to meet the decrease of demand due to the economy affects on equilibrium price.

Macroeconomic principles come into play when the whole market or more outside factors are involved. Examples of this in the video game industry, which I work in, would be when the rating system for games are under scrutiny, or when a new console is put on the market as competition. These outside factors affect not only the company I work for, but every other company in the industry, from the hardware manufacturers such as Microsoft and Sony, but also the game studios such as Activision, EA and Rockstar Games. Microeconomic principles are caused by and effect only my company in particular, such

Microeconomics deals with the individual parts in the economy and how they relate to each other. Macroeconomics deals with the totals of these parts in our economy

Microeconomics focuses on supply and demand. A company would look at ways to increase production so that the company could decrease their prices compared to competitors. This would adjust the equilibrium price of products by increasing the quantity that is available. This allows the company the capability of passing price savings to consumers. Macroeconomics is used as the economy changes such as with inflation. Inflation would cause a company to have a boost of cost in materials from producing their product. This creates a change in quantity to be provided as supply has to be adjusted to meet the decrease of demand from the effects on equilibrium price.

Reserve requirements also known as reserve deposits are funds that banks are required to place with the Federal Reserve. Reserves fall into two categories, required reserves which is a mandatory dollar amount mandated by law and additional reserves which the bank voluntarily places with the Fed. The excess reserves on deposit with the Fed earn a small amount of interest so it is usually kept to a minimum however; these funds can be lent to banks that currently

Reserve requirements as defined by the Board of Governors of the Federal Reserve System (2013) are “the amount of funds that a depository institution must hold in reserve against specified deposit liabilities”. The Board of Governors has the rights to change the reserve requirements, within limits specified by law (Board of

The Federal Reserve System (called the Fed, for short) is the country 's national bank. It was set up by an Act of Congress in 1913 and comprises of the Board of Governors in Washington, D.C., and 12 Federal Reserve District Banks. Congress organized the Fed to be autonomous inside of the administration - that is, in spite of the fact that the Fed is responsible to the Congress and its objectives are set by law, its behavior of money related approach is protected from everyday political weights. This mirrors the conviction that the general population who control the nation 's cash supply ought to be free of the general population who outline the administration 's spending choices (Investor Words, 2008). The obligation regarding controlling the country 's cash supply requires the Federal Reserve to impact the measure of store assets accessible to banks and in this way the level and bearing of transient loan fees. Whether banks and other budgetary foundations will make advances relies on upon the net revenue—the distinction in the rate of premium they must pay to draw in stores or acquire assets and the loan cost they can charge clients for credit. The more noteworthy the net revenue that banks can understand on new advances, the more they will need to loan. To impact loan fees on stores and financing costs that banks pay to obtain reserves, the Fed utilizes its congressionally in truth, power to make cash (Johnson, 2002).

The Federal Reserve mostly uses the open market operations to conduct its monetary policy. The reason is that, prior to the 2007-2008 financial crisis, the Fed thought that the other two tools are no longer an effective tool for long-term use, because they may cause market interest rate to rise when employed, thereby dampening the customer and business spending, slowing economic activities and decreasing inflationary pressure. For example, if the Fed uses the discount rate tool, it will be difficult for them to forecast changes in bank discount window when there is a shift and it will pose an upward pressure on the federal funds rates, according to the basic principle of supply and demand. Also, the changes in the reserve requirement can back fire into an uncertainty (wondering whether the bank will convert excess reserves into new loan or what portion of the new loan will be returned to depository institution in form of transaction deposit.) In short, using the open market operations helps Federal Reserve Bank to influence the supply of bank reserves by trading government securities on open market with the purpose of adjusting the technical, interim forces from shifting the efficient federal funds rate too far from target rate, thus generating additional

According to Library of Economics and Liberty, “So influential was John Maynard Keynes in the middle third of the twentieth century that an entire school of modern thought bears his name. Many of his ideas were revolutionary; almost all were controversial. Keynesian Economics serves as a sort of yardstick that can define virtually all economists who came after him.” (Library of Economics and Liberty, n.d.).

Microeconomics involves supply and demand in an individual market, individual consumer behavior, and externalities arising from production and consumption; while, macroeconomics involves monetary/fiscal policy, reason for inflation and unemployment, and international trade/ globalization.