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Economists have no final consensus on whether a central bank should be required to focus only on inflation or should have greater discretion. For those who subscribe to the inflation targeting philosophy, the fear is that politicians who are worried about slow economic growth and unemployment will constantly pressure the central bank to conduct a loose monetary policy—even if the economy is already producing at potential GDP    . In some countries, the central bank may lack the political power to resist such pressures, with the result of higher inflation, but no long-term reduction in unemployment. The U.S. Federal Reserve has a tradition of independence, but central banks in other countries may be under greater political pressure. For all of these reasons—long and variable lags, excess reserves, unstable velocity, and controversy over economic goals—monetary policy in the real world is often difficult. The basic message remains, however, that central banks can affect aggregate demand through the conduct of monetary policy and in that way influence macroeconomic outcomes.

Asset bubbles and leverage cycles

One long-standing concern about having the central bank focus on inflation and unemployment is that it may be overlooking certain other economic problems that are coming in the future. For example, from 1994 to 2000 during what was known as the “dot-com” boom, the U.S. stock market, which is measured by the Dow Jones Industrial Index (which includes 30 very large companies from across the U.S. economy), nearly tripled in value. The Nasdaq index, which includes many smaller technology companies, increased in value by a multiple of five from 1994 to 2000. These rates of increase were clearly not sustainable. Indeed, stock values as measured by the Dow Jones were almost 20% lower in 2009 than they had been in 2000. Stock values in the Nasdaq index were 50% lower in 2009 than they had been in 2000. The drop-off in stock market values contributed to the recession of 2001 and the higher unemployment that followed.

A similar story can be told about housing prices in the mid-2000s. During the 1970s, 1980s, and 1990s, housing prices increased at about 6% per year on average. During what came to be known as the “housing bubble” from 2003 to 2005, housing prices increased at almost double this annual rate. These rates of increase were clearly not sustainable. When the price of housing fell in 2007 and 2008, many banks and households found that their assets were worth less than they expected, which contributed to the recession that started in 2007.

At a broader level, some economists worry about a leverage cycle , where “leverage” is a term used by financial economists to mean “borrowing.” When economic times are good, banks and the financial sector are eager to lend, and people and firms are eager to borrow. Remember that the amount of money and credit in an economy is determined by a money multiplier —a process of loans being made, money being deposited, and more loans being made. In good economic times, this surge of lending exaggerates the episode of economic growth. It can even be part of what lead prices of certain assets—like stock prices or housing prices—to rise at unsustainably high annual rates. At some point, when economic times turn bad, banks and the financial sector become much less willing to lend, and credit becomes expensive or unavailable to many potential borrowers. The sharp reduction in credit, perhaps combined with the deflating prices of a dot-com stock price bubble or a housing bubble, makes the economic downturn worse than it would otherwise be.

Questions & Answers

economics is about to economise . discuss
Angel Reply
Underlines the efficiency aspect. Economise towards what: Economise factors to reach equal distribution of Material wealth or Just to operate optimally to Service demand, i. e. Run markets efficiently?
Homo
join the conversation
abba Reply
what is terms of trade
Ibrahim Reply
different btn import and export
Angel
No question... This is nice
Gbenga Reply
hw can we solve problem of scarcity
Oigebe
scarcity is not necessarily a problem but a constant condition of the world. there are not enough resources to satisfy the unlimited wants.
Matthew
wee need to be cooperative
Zakaria
by unlimited resourses and abundant want
Angel
why do compute GDP?
steven Reply
can anyone shortly determine the word inflation.
Ibrahim Reply
Continous increase in the general level of prices or in the cost of living.
arshad
persistent increased in general price level
Machall
all correct...
paa
inflaction
Angel
the father of economics
Reuben Reply
Adem smith
sj
Adem smith
Ajit
Adem smith sure
Adigwe
the father of economic regarding to adam Smith
Ibrahim
the father of political of economic and capitalism in his book and inquary in to the wealth of the nation.
Umar
Adam Smith his the father of economic
Mamudu
difference between injection and leakage
Asif
what is monopoly
Razak
Monopoly is a market structure where there is one firm who dominate the industry
wisdom
hi,, I am new here. please welcome me.
Mohammad
you are welcome
Adigwe
monopoly is the one characterized by a mkt power in which a firm is a price maker
Festo
Some member just ask questions but not answering so y this happen
Festo
Monopoly is a market where only one seller exists. No competition
Fred
how long does the patent right prevail the monopoly
Festo
no attempt
Zakaria
what is state farming
Sadiq
anybody to attempt
Festo
different types of price elasticity of demand with the aid of graphs
Tshepo Reply
what about mean median and mode
Dike Reply
mode is the most occurred number and median is the middle digit
John
the mean is the sum of all the data divided by the number eg: 2+4+4+5+3+5+1 =24÷7
BEGE
economics
ghani
what is exchange rate
Festo
thanks guys
Runwell
What is Equilibrium?
Santos
that when supply equals demand. that's where the supply curve and the demand curve intercept.
Oladele
equilibrium is when the both side of the price is balanced
Asuquo
Thanks Asuquo Agwuu
Santos
what is paradox Of drift
doris Reply
***economicsdiscussion.net/income/concept-of-paradox-of-thrift-with-diagram-micro-economics/713
lungku
it's thrift not drift
lungku
so what is it sir
Festo
what are the causes of unemployment
Afful Reply
lack of job in the rural areas
Nicholas
High level of illiteracy
Muhammad
Unfulfilled government promises
Vee
this one no be problem waii
Nicholas
low rate of industrialisation
Mimi
elements of economic
Muhammad Reply
Supply demand consumer and money.
Muhammad
please would you explain further about short run and long run
Doris Reply
Can someone please tell about any social economic issue
Abdul Reply
what is economic growth
Enone Reply
Good morning. It is within a period of time that goods and services increase to become more efficient.
Hughes
Economic growth is also the growth of income and it can take place under conditions of high unemployment and general poverty.......
favour
I fink av answered your question
favour
Can someone please tell me about any Social Economic issue ?
Abdul
what is human capital formation
Thato
It deals with humans behavior
Afful
Can someone mention the types of unemployment
Afful
Interest
Afful
income inequality and poverty can be included as social economy
Festo
what is the relationship btn indifference curve and consumer utility maximization
Festo
what is the the law of diminishing marginal utility
Doris
pls one question at a time
Nicholas
the law of diminishing marginal utility states that , the more a commodity possessed les satisfaction is derived from it
Festo
structural unemployment, seasonal unemployment, disguised unemployment,
Festo
each indifference curve has its own level of satisfaction and for consumer utility maximization a budget line should be tangent to indeference curve.
Festo
let's discuss together guyz come on
Festo
can any one mention elements of economic
Muhammad
start it then
Doris
haw about human capital formation
Festo
Doris I don't understand about human capital formation, so how do u understand it?
Festo
please national income
Adigwe
national income means MKT value of all final goods en services in particular particular period of time usually a year
Festo
The transformation of raw human resource into highly productive human resource with these input. Human resource can be turned into human capital with effective input.
Doris
Muhammad, as in environmental sense ?
Hughes
From my understanding I am currently taking up Econ 302 Principles of Economics. There's 3 that I know of. 1. Traditional 2. Command 3. Market
Hughes
importance of economic
Zakaria Reply
satisfaction of human wants
Festo

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Source:  OpenStax, Principles of economics. OpenStax CNX. Sep 19, 2014 Download for free at http://legacy.cnx.org/content/col11613/1.11
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