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Principles of Economics Aims, Essay Example

Pages: 6

Words: 1716

Essay

Introduction

Considerably, there are some circumstances where the economy of a nation grows at unexpected pace. To be precise, the economy might be at either the recession stage or the inflation threat. Thus, if the above occurs, the government bears the responsibility to stabilize the situation. Here the following methods are used as a speed limit to both fast growth and recession. Hereby, the government must formulate certain policies that will regulate the above situation. Some of the policies are as follows:

Growth and stabilization

Here, it is federal governments’ mandate to regulate or rather guides the pace of the economy in a country. Consequently, in attempting to control the overall pace of the economy, the federal government should analyze the following, maintain steady growth, employment on its high level, and hence analyze the price stability (Mankiw 89). Apparently, the federal government can control the first growth of the economy by the following main policy: monetary policy; here the government basis its fight on the control and the use of credit. This will control the economy at greater heights; minimize the fast growth of the economy. Another policy is the fiscal policy; here, tax rates and the spending of money is adjusted at length. Due to the following policy’s, the government can be able either to slow down or speed up the growth of the economy depending on the current economical situation. Hence, stabilizing the current economical crisis is government’s responsibility.

Notably, the above was experienced in reality in the year 1930. This is when the rate of unemployment was very high and the government was experiencing a slow rate of economy growth. The government reduces taxes so that the consumer may incur high expenses rectified the above situation. Again, a real life example on inflation was witnessed in the year 1970s where, there was a major price increase particularly in the energy sector, which again proved a threat to the economy (Taylor and Weerapana 120).

The second policy is the regulation and control. Here, the federal government decided to regulate the private enterprises in several ways. Besides, the government regulation falls in to main categories, which are indirect or direct economic regulations that will control the prices in the country. Traditionally, the government did opt to prevent the monopolies where the price of certain goods was regulated not to surpass the stage at which the government can control. Here, the government decided to change and stabilize the fluctuation demand and supply in the market. In addition, there is another economic regulation policy, the antitrust law. The above law seeks to strengthen the forces in the market so that supply and demand regulation will not be necessary. Further, antitrust law has hindered the mergers or practices that would in one way or another hence limiting competition. In addition, the government usually takes good control on the private firms in order to achieve the social goals required for the well rerunning of the country’s economy. The above activity may be protecting safety or public health and maintaining a health and clean environment, as well as a ban on harmful drugs. Notable fact is the federal government regulates all of the above policies.

Financial institutions

For any government to operate at its peak in the economy, there are several financial bodies that are responsible in the government operation. Some of these financial branches are the banks, the insurance company, brokerages, and lastly investment companies.

Insurance companies

Here, this company does collect premiums from groups of people with the intention of protecting them. The companies also protect the life of the premium people’s loved ones against loss like the illness, lawsuit, car accident, and fire to mention but a few. Essentially, insurance companies help individuals to preserve their wealth and manage the risk.

Brokerages

This is the act of intermediating between buyers and sellers to ensure security transactions. Therefore, the individual concerned are termed as the brokers. Thus, the broker company receives its dues after the completion of successful transactions. Further, besides receiving money after a full transaction is made, the brokerage company also provides investment services, trade execution, and the portfolio management. Therefore, after the above service, the customers are supposed to pay commission an each trade significantly. Here, the broker does not engage fully in the research for customers and further they allow customers to make their own decisions.

Investment Company

As any other financial institution, the investment company allows free interaction with customers who intent to invest with them. They professionally pool their funds with individuals of the same interest. Further, instead of purchasing the combinations of the individual bonds or stocks for a portfolio, a purchaser is legible to do the purchasing directly through mutual fund. Mutual fund is a kind of purchasing package that the investment company uses for the investor to buy security. Generally, all the financial institutions act as intermediaries flanked by dept market as well as the capital market. Further, the financial institutions take the responsibility of transferring fund from the investors to the concerned companies. Lastly, the financial institution are the primary bodies that are responsible in the controlling the flow of money in the economy.

How commercial banks create money

The commercial banks are responsible in the creation of money and not expansion as the central banks. Here the commercial banks bases there operation for creating money in several ways as interest and lending, fees and charges.

Charges and fees

Here, one known ways that commercial banks make money as, by the use of penalties and fees charges. For instance, one can pay a monthly fee if he or she has a checking or saving account. In addition, the banks also create money by not only receiving but also sending wire transfers. In addition, they keep valuables in the deposited boxes, where they charge a fee on them. There are several penalties imposed on the late fees on credit cards and the overdraft fees. Another method is the fees that are imposed on the use of credit cards and the ATM of another Bank.

Lending and interest

Deposits from business and individuals are used by the commercial banks to create money. The above deposits could be as follows, the savings, checking as well as certificates of deposits to mention but a few. On the contrary, the bank again lends money to the persons in the following form, the student loans, business loans and auto loans etc. after, the lending of loans, the bank goes ahead to  earn interest and impose a charge on the loans. They also earn interest in the bound they purchase mostly from the government. To curb it all, this is how the commercial bank creates money.

Central bank money expansion

It is noted, that the banks are entitled to reserves that are equivalent to the fraction of their entire deposit. On the contrary, if the reserves are in increase then there will be increased earning assets. It is worth to note that, the required equivalent in the most transactions should be 10 percent. Thus, the bank with excess reserves will have the opportunity to lend loan. Again, the bank does not pay out loans with the deposits, since they will not be able to loan out to interested people. More so, it is unclear that the money expansion revolves around the loan payment as well as deposits. Following the above, it is vital to heed that reserves are not whatsoever used for loan payment. On the contrary, the total deposit of the bank is constituted by the deposit credits.

Global economy entails the integration of the world’s economy with free movement and the unrestricted services, goods and labor on transnational. Global economy also portrays the picture of free capital movement across the world through interconnections. In other word, globalization concerns the product integration and consumptions across the world in all markets. Mostly, the above occurs when trading nations put cease to the artificial barriers by the concerned nations (Taylor , Weerapana 452). Despite of the majority of nations enabling the above phenomena, there are advantages and disadvantages that result as follows;

Advantages

Because of trading globally, the involved countries benefits by getting the increased production. Due to comparative advantage, the free trade enables the concerned countries to specialize hence this leads to increased production (Mankiw 123). Because of the above specialization, the countries benefits buy the generated efficiency from the economy of scale as well as increased output. Further, the global trading increases the firm’s market size, which will result in the average costs and hence the increased productivity, which will automatically lead in the increase in productivity. The second advantage is the production efficiencies; here the efficiency of the resource allocation is improved. The third advantage is the benefit of the consumers, since there are greater variety of services and goods the domestic customers benefits a lot. Lastly, another notable advantage is the gain in foreign exchange, employment and the economic growth.

Disadvantages

Professionally, with the removal of barriers, there could be an occurrence of structural unemployment in a short while. The above can cause a wide impact of the workers, economies and the families. Secondly, the international trade cycle may increase the economic instability, since the economies will be controlled internationally. Further, in many nations, the international market is not a good level for playing ground. There could be difficult in establishing new industries and lastly, global economy can cause pressure on GFC protection. Wisely, the international economy can expand drastically with if the labor is primarily made mobile. This is because; work force or labor facilitates the rapid floe of services and goods, hence increasing the profit of the concerned countries.

Barriers to the global economy

In most cases, the main barriers to the global economy are the quotas, tariffs and the non-tariff barriers. Tax entails rising price of the goods to customers by the federal government. This is one of the major berries to the global economy and so can cause to the declined of the trade. In addition, there are several limits in the quantity of the goods for exported in a particular country. Generally, the above are the barriers to the global of economy.

Work Cited

Mankiw, Gregory. Brief Principles of Macroeconomics. New York, NY: Cengage Learning, 2007.

Taylor , John and Weerapana, Akila. Principles of Economics. New York, NY: Cengage Learning, 2008.

Rex Bookstore, Inc. principles of economic. London, 2009.

Mankiw, Gregory .Principles of Economics. New York, NY: Cengage Learning, 2010.

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