I need help understanding the following MBA macroeconomic problems: A What are the tools used by the Federal Reserve to control the money supply? B How do these tools influence the money supply, and in turn, affect macroeconomic factors?
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By Ryan Barnes Updated May 1, — Investors are likely to hear the terms inflation and gross domestic product GDP just about every day.
They are often made to feel that these metrics must be studied as a surgeon would study a patient's chart before operating. The chances are that we have some concept of what they mean and how they interact, but what do we do when the best economic minds in the world can't agree on fundamental distinctions between how much the U.
Individual investors need to find a level of understanding that assists their decision-making without inundating them in piles of data. Find out what inflation and GDP mean for the market, the economy and your portfolio.
Terminology Before we begin our journey into the macroeconomic village, let's review the terminology we'll be using. Inflation Inflation can mean either an increase in the money supply or an increase in price levels.
When we hear about inflation, we are hearing about a rise in prices compared to some benchmark. If the money supply has been increased, this will usually manifest itself in higher price levels—it is simply a matter of time.
For the sake of this discussion, we will consider inflation as measured by the core Consumer Price Index CPIwhich is the standard measurement of inflation used in the U. Core CPI excludes food and energy from its formulas because these goods show more price volatility than the remainder of the CPI.
It is important to keep in mind that the GDP figures as reported to investors are already adjusted for inflation.
For stock market investors, annual growth in the GDP is vital. If overall economic output is declining or merely holding steady, most companies will not be able to increase their profits, which is the primary driver of stock performance.
However, too much GDP growth is also dangerous, as it will most likely come with an increase in inflation, which erodes stock market gains by making our money and future corporate profits less valuable.
Most economists today agree that 2. But where do these numbers come from? To answer that question, we need to bring a new variable, unemployment rateinto play. For related reading, see Surveying The Employment Report. Studies have shown that over the past 20 years, annual GDP growth over 2. Unfortunately, however, this positive relationship starts to break down when employment gets very low, or near full employment.
Aggregate demand for goods and services will increase faster than supply, causing prices to rise. Companies will have to raise wages as a result of the tight labor market.
This increase usually is passed on to consumers in the form of higher prices as the company looks to maximize profits.
Over time, the growth in GDP causes inflation, and inflation begets hyperinflation. Once this process is in place, it can quickly become a self-reinforcing feedback loop. This is because in a world where inflation is increasing, people will spend more money because they know that it will be less valuable in the future.
This causes further increases in GDP in the short termbringing about further price increases. These are lessons that most advanced economies have learned through experience; in the U.
Asking this question uncovers another big debate, one argued not only in the U.Conference – Discussion In Conference Introduction; The Determinants of Long-Run Growth such as reducing unemployment, suggest a required GDP growth rate of nearer to or per cent for at least the next five years.
Casual inspection of Figure 4 suggests that inflation and GDP per capita growth rates are positively.
In other words, if the gross GDP was calculated to be 6% higher than the previous year, but inflation measured 2% over the same period, GDP growth would be reported as 4% or the net growth over. Macroeconomics: Inflation; Macroeconomics: The Business Cycle Learn how to distinguish between the U-3 and U-6 unemployment rates, and explore which rate provides a truer picture of.
stagflation: Inflation accompanied by stagnant growth, The Phillips curve depicts the relationship between inflation and unemployment rates.
The long-run Phillips curve is a vertical line that illustrates that there is no permanent trade-off between inflation and unemployment in the long run.
Consequently, employers hire more workers to. In a certain way macroeconomics does helps in achieving the goal of economic growth, higher level of GDP and higher level of employment. It also analyses the forces which determine economic growth of a country.
Understanding the macroeconomic problems gives a cue on how to reach the highest state of economic growth and sustain it. Generally there is a relationship between inflation and unemployment – the lower the rate of unemployment, the higher the rate of inflation.