It can also be represented through supply curve to know the relationship between price and quantity which in this case is directly proportional. There can be either reduction in supply or increase in supply but this change is dependent on some factors like any change in the price of other goods will encourage the supplier to switch similarly the change in the prices of raw materials used in production will also affect the supply curve.
Another factor is the technological advancement which, if adopted, will result in increased prices, or it can also result in a reduction of the production prices and increasing demand. A record of the changes occurred in the market place due to deflation, or inflation is known as gross domestic product or simply GDP. The rise in the prices results in inflation, while the downward fall in prices results in deflation. If the change is evaluated at the prices of some base year, it is called real GDP.
Unemployment rate refers to that skilled labor force which is well capable of working but are not being utilized for doing any work and are still unemployed. It does not include those who are capable of working, but are not willing to work; such people are termed as discouraged workers. Frictional describes the concept of not finding and matching the new jobs with the qualified labor, which is willing to work and the reason is mostly due to insufficient information about the new and current job openings.
On the other hand structural unemployment occurs mostly due the changes in the economy, which results in downsizing in organizations and restricting the workers from the work available due to lack of knowledge or not up to date knowledge.
The basic principle of the classical theory explains that the economy changes itself and is self-regulating. Money as defined is anything that is accepted in transaction from one person to another for the sale and purchase of goods.
Money can be used as:. The medium of exchange is vital as it helps in eradicating the barter system which involved the exchange of goods or services only which is termed as a double coincidence of wants.
Medium of exchange made transactions easier and broadened the scope of trade around the world. Money needs a store of value to hold its value over time and to remain the medium of exchange.
If there is no store of value for money, then it will lose its importance as a medium of exchange. Although it does not have the uniqueness as a store of value and people have other options, but its liquidity gives it and edge and preference over other stores of value as it is readily accepted and available and can be easily transported.
As a unit of account money provides valuable information and helps in decision making. It helps the supplier in deciding the rate of supply and the buyer to calculate the demand and the measuring their values in terms of price or money. The uncertainty of the future, the inflation and the interest rates and not to forget the level of income are factors that greatly influences the demand for money. The three motives that creates the demands are briefly explained below.
Since the availability of money is prominent for transactions so its demand cannot be sidelined. With the passage of time, transactions tend to increase and so will the income rise with a rise in the GDP and that directly increases the transaction motive. As mentioned above that the uncertainty of future influences the demand for money. Precautionary motive require demand for money whenever there is some unexpected payment to be done. The value and demand of an asset heavily depend on its opportunity cost and the rate of return.
Money is also an asset, but results in depreciation during inflation and will provide no rate of return no matter for how long its been saved or holding it. The legislative branches of the government hold and implement the fiscal policy for every country. Government expenditures and the taxes are defined as the two main instruments of the fiscal policy because government needs to finance the expenditures that it undertakes to fulfill the demand of goods and services of people and to finance those expenditures it collects taxes from the people.
The government can either be in deficit or surplus depending the number of people paying the taxes. When the payments surpass the expenses, the government stays in budget surplus, but if the case is opposite, i. To fulfil or overcome that deficit in the budget, the governments borrow money or take loans from other nations or international financial institutions like the world bank and IMF thus increasing the national debt. Governments taking loan from other nations for the fulfilment, expenses continuously increase the national debt and stays in the credit line because the money supply stays constant.
With loans comes interest that shows an increasing trend thus resulting in increase debts. This situation eventually gives rise to aggregate demand and country has to deal with inflation that brings its own charms and result in making the situation even worse. So keeping the national budget balanced a government needs a balance in income and expenses. When the banks need to borrow the reserves to meet their reserve requirements, the central bank charges the interest known as the discount rate.
The flow of many depends heavily on the discount rate. Banks will hold the money flow if the central bank sets the discount rate high on the other hand low interest rate will encourage the smooth flow of money and encourage the investments.
When the central bank is using its instruments of monetary policy to increase the supply of money, it is said to follow the expansionary monetary policy.
To the contrary, if the central bank is reducing the supply of money using the instruments of monetary policy it is undergoing contraction monetary policy. For Economics textbook solutions and answers, please go through at https: Our Economics clientele consists of both high school introductory level students and advanced university degree students, with varying levels of knowledge and understanding. My Homework Help enjoys a high rate of repeat customers for Economics, in addition to student referrals from satisfied customers.
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