Macroeconomic in Finance Essay Example | Topics and Well Written Essays - 2000 words

Macroeconomic in pay - Essay ExampleThese models also highlight the interrelatedness of variables in the economy, which is one of the core concepts in coeval macroeconomics.Explain how the effectiveness of both fiscal and financial policy is dependent on the sensitivity of bills demand to the bet step in the closed-economy. Explain how other factors may also impact on policy effectiveness.Monetary policy is the organization or central bank process of managing the money supplying to achieve specific goals such as constraining inflation, maintaining an exchange rate, achieving full employment, or economic growth. The monetary policy tools refer to the policy tools of the central bank used to affect the money supply and kindle rates such as open market operations, changes in the discount rates, and changes in the reserve requirements (Mishkin 2004). It should be noted that the effectiveness of all these policies rests on the relationship between money supply and interest rate. Accordingly, an make up in the money supply tends to bring a reduction in the interest rate spell a decrease in money supply brings about a rise in interest rates. It is notable that without affecting the interest rate, monetary policy renders no effect on the economy. For example, a government wishing to eliminate unemployment pursues an expansionary monetary policy lowering the reserve ratio. This in effect will conk to excess reserve rates and encourages bank lending while increasing the money supply. Since interest rate is inversely related with money supply, interest rate falls which encourages investment. Aggregate demand increases and unemployment is reduced or eliminated through the creation of