Theoretical Analysis of News Article A Working Model: Is the World Experiencing Excess Saving or Excess Liquidity?

(1) Explain what the Stable-Monetary-Unit Assumption is (10 points) and (2) provide an example of its application. (10 points)

The long-run equilibrium of the economy is found where the aggregate-demand curve crosses the long-run aggregate-supply curve (point A). When the economy reaches this long-run equilibrium, the expected price level will have adjusted to equal the actual price level. As a result, the short-run aggregate-supply curve crosses this point as well.

Monetary development is something that everybody around the globe battles with ordinary. A great many people are unmindful in respect to what 's genuinely happens in the economy as to expansion, unemployment, and loan costs; these things are all directed by a national bank called the Federal Reserve System. The arrangement that I will talk about in this paper chooses if unemployment, hobby, and swelling declines or increment is fiscal strategy. Money related arrangement chooses what value a man pays for a thing at the store, the amount of premium a man will get charged on an advance for an auto. These are all things that no one genuinely asks themselves, a great many people simply search around and pick the best value or the best financing

In this paper, we will be using the log-log model. The log-log model used for the demand for wealth (attuned for inflation). We will be using the M1, as a display, for demand on wealth and interest rate as the illuminating variable affecting the demand for wealth. Using the regression, we will study the hypothesis. For this paper, the hypothesis used will talk about the connection between money and the interest rate. The null hypothesis, in this case, will be the interest affecting the demand for money in the economy. The data that we will be reviewing is from October 2008 to October 2011, 3 years worth of data. This connection will give us the basic understanding of the performance of the monetary policy in US economy after the crisis.

The internet has allowed the money market to operate 24 hours a day. It has been noted however that exchange rate volatility has increased,[v] which makes it more difficult for the government to set monetary policy.

IS-LM model can be used to show the effect of expansionary and tight monetary policies. A change in money supply causes a shift in the LM curve; expansion in money supply shifts it to the right and decrease in money supply shifts it to the

4.|In the Keynesian-cross model, both the price level and interest rate are held constant. A decrease in government spending reduces output by 1/(1 – MPC) times the change in government spending. In the IS-LM model, the reduction in output caused by the decrease in government spending is partially offset by an increase in investment (crowding in). In the IS-LM model, the decrease in government spending reduces income as in the Keynesian-cross model, but the reduction in income also reduces the demand for money, which in turn reduces the interest rate for a given money supply. The lower interest rate stimulates the off setting investment spending.|

In conclusion with the information provided one can make an analysis that the amount of money in a nation’s money supply is crucial to the health of its economy. If there is not enough money in circulation, the economy cannot grow. However, too much money in circulation can also cause serious problems. If we all have too much money, and loans are too easy to obtain, the money itself loses value and inflation results.

A macroeconomic item (or factor) may be generally categorized as anything that influences the direction of a particular large-scale market (Investopedia, n.d.). For this analysis, the macroeco-nomic factor shall be interest rate (i.e. discount rate). The following sections that scrutinize the implications of changes to interest rates to the Company’s Present Value* (PV), based on its Free Cash Flows* (FCF); discuss the impact of an issue within the overall stock market on the Com-pany’s stock valuation numbers, other financial variables, or its overall portfolio management; and analyze and discuss the impact of an external factor to the Company.

1441-1442) mention that, in this model, shocks due to innovation and/or expectations can generate credit cycles and asset price fluctuations. Furthermore, they highlights three worth considering properties of this model related with the recent credit boom. First, loose monetary policy may not fully explain credit booms and asset bubbles because a decline in interest rate increase the money demand and the price of assets but the result on credit demand is ambiguous. The unclear effect on credit demand occurs because the positive effect of declining interest rate and the negative effect of lower cost of equity. Second, demand for credit and asset prices increase if expectation for higher future asset prices exist. In that case, the result in money demand is not certain. The higher asset prices influence positively money demand but the expected return of real assets negatively. Ultimately, the expansion of credit, due to for example financial innovations, to lead to lower interest rates and higher money demand and asset

This discourages consumers and businesses from taking loans, and instead save money, as shown by the contraction in demand for money in Fig 1.1 from Q1 to Q2. This will lead to less money being circulated in the economy, with lower consumption and a contraction in investment by businesses, as shown in Fig 1.2. AD will therefore decrease and shift to the left from AD1 to AD2, shown in Fig 1.3, as consumption and investments are amongst the determinants for AD. With a left shift in AD, a new equilibrium point is established at B with a lower price level (APL2) and lower economic growth (Y2).

Asymmetry in the credit markets result in a wedge between the costs of external funds (i.e. from banks and other lenders) to the public, and the cost of internal funds. Thus, internal funds, bank loans and other sources of financing are imperfect substitutes for firms. These imperfections related to credit market frictions causes monetary policy changes to affect both the bank-lending channel and the balance sheet channel \citep{Gertler1995}.

This example of short run and long run aggregate supply and demand brings us straight into IS-LM Model. The IS-LM Model shows the combinations of both income and interest rates and shows how equilibrium is reached in both the goods and money markets. This model involves two schedules/curves, the IS curve and LM curve. The IS schedule shows the different combinations of income and interest rates at which the goods market is in equilibrium and the LM schedule displays the combinations of interest rates and income compatible with equilibrium in the money market. IS-LM schedule in equilibrium or the goods and money markets in equilibrium.

This has the effect of bringing down interest rates, injecting money into the economy, and thus encouraging borrowing and spending. However, when interest rates are at or near zero and the economy still requires stimulus (a dangerous situation now referred to as a “liquidity trap”) (Blinder 466), central banks must use more extreme methods to resuscitate the economy.

There are different approaches to determine the current account. In this essay it is worth to explain the “saving-investment balance approach” since Bernanke’s “saving glut” idea is based on it. The identity for