Macroeconomics Theory Term Paper Example | Topics and Well Written Essays - 1250 words

Macroeconomics hypothesis - Term Paper ExampleForeign exchange rate is the hurt of one currency in terms of another currency. BOP has direct relation with the foreign exchange market as the consumption of the consumer depends on the value of currency in other countries. Under the free- blow currency regime (McGregor) the balance of requital depends highly on the forces of contribute and demand. In this free-floating regime, the price of the currency automatically adjusts according to the requirement which equals the supply and demand of the currency. This shows that in this market conditions, price automatically is in equilibrium in the balance of payment. there is no intervention by the authorities due to which the outcomes are automatically achieved by counteracting between twain the current account and the capital account. This market is also termed as self-correcting market which fluctuates continuously based on the changing market conditions. Under the fixed-rate currenc y regime (Bized), intervention by the politics is mostly seen to set the exchange rate. The price in this exchange rate is not automatically adjustable as compared to the floating exchange rate. The government has to intervene to adjust the value of foreign currency to the countrys currency. ... It is an indwelling tool to analyze the macro-economic policy. The relation between the unemployment and income is that falling unemployment might give rise to inflation and on the other hand rising unemployment would lead to fall in the inflation. To reduce the unemployment rate, average demand mustiness be amplifyd which would increase the employment for short-period (Baumol and Blinder). Supposing that the economy is stable at Y. Increase in the government spending will shift the AD curve from AD to AD1 which would lead to the increase in income and simplification in the unemployment in the short term. The outward shift of the AD curve to AD1 takes the equilibrium to Y1 which create s a demonstrable gap which is thought as the cause of rise in inflation. Due to such shift the price changes from P to P1 but due to the inward shift of the AS curve the price again shifts from P1 to P2 which shows increase of the P but the shift brought back the equilibrium at Y at P2. The major condition for the rejection of Keynesian theory was the weakness regarding the stagflation in 1970s. Keynesian theory was focused on increasing the government spending when the unemployment was high and when the inflation becomes a problem the government should reduce its spending. This shows that Keynesian theory was address to stabilize the economy through government creating cash flows (Dornbusch, Fischer, and Startz). After the rejection of Keynesian theory regarding stagflation, New sheer became the new exemplification. The reason behind the selection of New Classical theory as a standard was the price system which efficiently adjusted the supply and demand in all market. This the ory was focused on simple basis that the equilibrium point is achieved when the quantity supplied