1. G20 summit to test EU debt deal
2. As Greece faces default, where is Europe's firewall?
Summary: key points in the article
The G20 countries are to meet in France to make major decisions for the global economy. Europe is in crisis both from huge debts and the banking sector is also in trouble. In particular, Greece is the country with the largest debt crisis. Efforts in the meeting will be to strengthen the bank balance sheets by reducing the budget deficits to prevent the weakening of the Euro. The source for this cash bailout is expected to be borrowed from emerging powers such as China. The growth of the European Union has seen a steep decline to 1.6% and is estimate to drop to 0.3% next year. Proposed plans are to create more employment through a bill to create jobs and reducing government spending (Ben, 2011).
Two years ago, $5 trillion were pumped into the IMF to strengthen the financial sector as a compromise reached by the G20. New rules were put in place against risky financial markets practices, and also to boost hiring. However, the situation never fully recovered and in order to boost growth and manage imbalances the group focuses on unemployment, to reduce debts and balance budgets. The G 20 is expected to make reforms in the “international monetary system” (Desmond, 2011). This refers to flows of capital, policies on currency exchange rates and taxes that will apply in transactions in currency markets and stock trades. The interest rates have to be set through new policies. What does this mean in the short and in the long run?
Graphical application
Such a case of economic recession that has hit the European Union is unpredictable and irregular. In this case Real GDP, productivity, spending and other income measures fall while unemployment is rising. Using the model of aggregate demand and aggregate supply we can do a short run analysis of the recession. Productivity and price levels adjust to try to create a balance in aggregate demand and aggregate supply. The policies being set will work to raise domestic consumption, investments, and government expenditure and increase exports.
Three effects shift the aggregate demand curve downwards. The effect of the interest rates is that they fall stimulating spending on investments as a result of low levels of prices which reduces household quantity demand for money and as the households take actions to exchange money for assets that will bear interests they fall. The effect of wealth is that consumer spending is stimulated by a rise in the real value of the money holdings by households as a result of low price levels. The effect of exchange rate is that net exports are stimulated by the currency depreciation in the money markets is as a result of low prices levels that reduce interest rates. The aggregate demand increases as a result of policies that raise investment, government spending, export increases, and consumption at a given level of prices which is what is expected to happen in Europe (Ben, 2011).
1. Shifts in the aggregate demand
The economy of the European Union at this point is in recession since the output is lower and the equilibrium prices drop. The aggregate demand shifts to the left and in the short run the output and price level fall. In the long run the aggregate demand changes a nominal cannot a real change in the price levels with the output remaining the same. To eliminate this recession the economist boost government expenditure and also increase the supply of money.
Therefore, in the long run the economy through the fiscal policies set will move to reach equilibrium where productivity is almost at full capacity. This is illustrated below:
2. Equilibrium in the long run
This position is achieved when the long run aggregate supply curve intersects with the aggregate demand graph and at this point the natural rate of output is attained and the perceptions, prices and wages have adjusted.
In the long-run, the curve that denotes the aggregate-supply curve becomes vertical since products quantities are dependent on the labor, capital, technology and resources in that particular economy. This is not dependent on the overall prices. Three theories are postulated to explain the upward shift change in the slope of the aggregate supply curve in the short run. The sticky price theory explains this, in that, production in firms is cut back in the short run by a fall in prices that was unexpected leaving some of the firms in the economy with temporary high prices. The sticky wage theory explains that what induces firms to reduce production and cut down employment as due to a fall in the levels of prices that was unexpected which causes them to raise wages temporarily.. The theory of misperception explains why suppliers reduce production. This is induced by unexpected fall in price levels which leads to suppliers them to think mistakenly that there is a fall in prices which are relative to their production. The three models give the impression that output changes from the rate which is ordinary when the actual level of prices diverges from the expected prices.
Policies or events that change the ability of an economy to generate output, for instance deviations in manual labor, wealth, technology and natural resources change the short run aggregate supply graph by shifting it which may also change the long run graph. It is dependent on the levels of prices expected in the short run (Ben, 2011).
A change in the aggregate demand curve causes an economic fluctuation. For example, a left change causes a fall in prices and output in the short term. In the long run, the anticipated price levels change will adjust the wages, perceptions as well as prices; this causes a shift to the right of the short term aggregate supply curve. The ordinary rate of the economy’s output is reached at a new and lower level of price.
The shift in the aggregate supply curve is another probable cause of economic fluctuation. A move to the left of the aggregate supply graph will have a short term consequence of output fall and rise in prices. This period of prices rising and the output falling is referred to as stagflation. In the long run, the price levels fall back to original levels and output increases as the adjustment of prices, perceptions and wages takes place.
3. Long run growth in outputs and increase in inflation
In the long run, progress in technology and monetary policies are the two forces that affect the economy. The change as a result, as illustrated above, is an increase in inflation which is normally referred to as demand pull inflation. This is caused by an increase in aggregate demand whose curve shifts upwards.
a. With progress in technology causes a move to the right of the long run aggregate supply graph
b. An increase in federal supply of money will raise the collective demand in the long run
This results in inflation rising and output growth as explained earlier.
Personal viewpoint
The article has enabled me to learn about fluctuation in an economy and its possible causes. The effect of increase in aggregate demand to prices and output as explained is at different capacity of the economy. The effects of fiscal policies on output and how money markets connect to goods in the market is well considered by the G20 summit efforts. Lastly, the shifts in demand and how it affects equilibrium price level and quantity are explained as to be dependent on the price elasticity of supply which is true from the review done.
References
Ben Rooney (3rd November, 2011), G20 summit to test EU debt deal, retrieved on 4th November 2011 from http://edition.cnn.com/2011/11/03/opinion/lachman-greece-default/index.html
Desmond Lachman, (1st November 2011). As Greece faces default, where is Europe's firewall? Retrieved on 4th November 2011 from http://money.cnn.com/2011/11/01/news/international/g20_summit/index.htm
