Related Learning Experience
Although it may not seem likely, I have been able learn a great deal about important microeconomic concepts and topic throughout my professional career. Importantly, this was not always the cause as it was not until I entered the field of finance and consumer credit that I began to learn about, and understand important elements of macroeconomics, as well as the role and influence they had with the national and global economy. Perhaps the most profound professional experiential education came during the recent global financial crisis and economic downturn that began in late 2007 and lasted until nearly 2011. Following the collapse of the housing bubble, and along with the massive defaults of subprime mortgages and mortgage backed securities, the United States experienced a tremendous credit crunch where finance companies and other creditors imposed considerably tighter lending criteria, while also substantially limiting the amount that could be borrowed. This credit crunch was witnessed first-hand by myself as I worked with a credit card company that changed its approval policy and credit terms to reduce potential risks of default. Further, the credit crunch also led to a major drop in spending among American consumers, which also became apparent as the credit balances on our firm’s credit card began to drop, while also defaults and late payments began to rise. It became abundantly clear just how much of an impact a financial and economic crisis can have on the whole entire economic system, even if the issue begins in one small area of the economy. In a free trade system, such as that seen in the United States, it is more likely for negative economic shocks to move throughout all areas of the economy to negative impact even those areas that seem completely detached from the area where the trouble began. Even more troubling is the fact that the recent trend towards globalization and the development of a strong and prosperous international market has caused negative economic shocks to travel outside the country they began in. In particular, when the financial and economic crises began in the United States, it only took a couple of months to impact other prominent nations that the U. S. partners with in trade, such as nations within the European Union (EU) and China. It is important to note, however that this systemic impact brought on by negative economic shocks does work both ways in that positive economic conditions have an equally positive impact that moves throughout the entire economic system, both domestically and internationally. As the national and global economy has begun to recover, the improvements have become apparent within my firm as credit terms and approval criteria have become more lax, while consumer spending through charges on their consumer credit cards with our firm are up and defaults and late payments are down. This was certainly a slow and arduous climb to recovery, but was a very interesting phenomenon to watch from the perspective of the financial sector.
Statement of Learning
For the most part, the scope of macroeconomics is far beyond that of an individual or a company as it encompasses the entire economic system, whether on a national or global scale. As a result, most macroeconomic concepts are not pondered or experienced on a regular basis, but rather, are things that simply happen in the background that are beyond our control. We just assume that someone is pulling the strings to ensure everything in the economy is running smooth. When it is, then most of us do not give a second thought to the factors and influences of macroeconomics that are at play. It is when there is a significant breakdown in the economic system that increased attention and scrutiny is paid to macroeconomic factors so that one can determine what went wrong, and more importantly, who is to blame. This sort of scenario notoriously played out in the ladder part of the last decade when economic and financial crises in the US began to spread throughout the international marketplace to wreak havoc on the entire global economy. Due to the fact that these crises and the ensuing international economic turmoil were covered extensively in the news, I was able to gain a considerable education on various components of macroeconomics and their impact on a nation and an individual. Further, this education provided me with valuable insights into macroeconomics, which I utilized during academic study of macroeconomics during my undergraduate education. It is through this montage of experience and academic education that I was able to gain a deeper understanding of valuable economic tools, such as monetary and fiscal policy, the various functions of a market economy, macroeconomic issues related to the government, and economic policies and their effects. In order to demonstrate the mastery that has been gained on these critical macroeconomic concepts, the following sections will provide a brief overview and discussion into each of the learning objectives of this course, which ultimately coincide with the knowledge that I have gained through experiential and academic learning. In addition, a variety of scholarly sources will be used to support my arguments and conclusions to strengthen the credibility of the overall discussion.
Market Economy Functions
There are a number of functions associated with a market economy, although none are more prominent and integral to the market economy than competition. Essentially, competition is what defines the market economy because it ensures a market type atmosphere that is based on trade and a pricing infrastructure that is in equilibrium according to the rules of supply and demand. In a market economy, there are little to no limits in the number of competitors that can service a particular market. In fact, in market economies, it is generally left up to the market to dictate how many competitors exist within a certain industry. This is because the number of competitors within a given market can significantly impact the market environment for the firms that are competing. Specifically, when a high number of competitors exist within a given market, each competitor must do something to capture sales and outperform their rivals. This often requires these firms to either minimize costs below those of competitors, reduce product prices to add customer perceived value, or a variation of both. The firms that are unable to lower their costs or prices as much as competitors will have no choice but to exit the industry in serve for other business opportunities. As a result, the market economy promotes success of the most efficient firms to ensure the smallest amount of waste between the buyer or seller.
Another major part of the market economy is trade, which is often viewed as a mechanism to feed competition, in that it allows competitors from anywhere in the world to compete within a given market in order to increase the level of efficiency by which the market economy is operating. The United States, which is one of the most prominent market economies in the world, serves as an excellent example in this regard when we consider the trade in which the nation engages with foreign countries. There are a variety of products that developing nations such as China and India are able to produce more efficiently and at a lower cost than the United States, which affords them a comparative advantage. As a result, when firms from China and India compete among US firms, they are able to parlay that comparative advantage into a competitive advantage because they are typically able to maintain costs much lower than those of firms within the United States, and as a result, are able to set prices that are much lower as well. As such, trade helps to fuel economic growth across the globe, and due to the systemic nature of the global economy, the positive shock of economic growth will eventually spread to positively impact all areas of the international economy, and not just the nation that first realized the economic prosperity. In the end, the trade function of the market economy ensures that all countries, and people are better off because they are able to select from a wider choice of goods that are at a lower price, which ensures the most efficient market that stays within equilibrium and keeps waste at a bare minimum.
Economic Graphs
Macroeconomic Issues Relating to the Government
The government generally represents the first line control of the nation’s economy. In particular, the government has at its disposal a number of controls and tools that it can use to influence the national economy to mitigate negative economic shocks or to maintain stasis within the economy if issues arise. In order to achieve this, the government enacts one of two types of policies, which include fiscal policy or monetary policy. Monetary policy generally involves influencing the supply of money within the economy to either motivate increased spending or to restrict consumer spending. Fiscal policy, on the other hand, is implemented through the government’s direct actions by changing their level of spending or the amount of revenue they seek to generate through tax collection. These actions also facilitate changes in consumer spending by influencing the amount of money that consumers have at their disposal. In particular, as government spending increases, particularly throughout social programs such as welfare, Social Security, and food stamps, the amount of money that recipients of these programs increases, which ultimately enables them to spend more. Further, when these recipients place their increased benefits in the bank, it provides the bank with more money to lend, which ultimately increases the amount of money available in the economy. Ultimately, the government is able to employ the tools of fiscal and monetary policy to control and make corrections to the national economy through manipulation of the national money supply. Most importantly, fiscal policy is often implemented to facilitate immediate changes to the national economy, while monetary policy is used to implement slower and more controlled changes on the economy. In order to better understand the mechanisms of monetary and fiscal policy, the following will provide a detailed discussion of these tools and how their use can effectively influence the national economy in a positive way, which typically seeks to spark economic growth for the country.
Fiscal and Monetary Policy Tools
As discussed previously, fiscal and monetary policies represent important and powerful tools that the government uses to control and manage the national economy. Monetary policy is used by the government to flex and change the supply of money in the economy. There are two primary mechanisms that are used to influence the money supply through the implementation of monetary policy, which include changes to the Federal Reserve interest rate and through changes to the required reserve level. Importantly, both of these mechanisms are conducted and implemented through the United States Federal Reserve Bank, also known as the Fed. First, the Fed can increase or decrease the prime interest rate in order to change the level of money in the economy. If the prime interest rate is raised, fewer individuals will borrow money, which leads to an overall reduction in the money supply. Further, lowering this interest rate will do the opposite by motivating increased borrowing, and thusly, increase the money supply. Changes to the reserve requirement would have a similar yet smaller impact on the money supply.
Fiscal policy involves changes to the money supply through increases or decreases in government spending and revenue collection. In particular, the government will often increase or decrease taxes in order to influence the money supply. Increase of taxes, for example, will reduce the amount of money within the economy as it is centralized with the government. In contrast, decreases in taxes will allow taxpayers to keep more of their income, which increases the supply of money within the economy. This also happens when the government increases its spending. Increased government spending, such as through a stimulus package or increases to social programs, will further increase the supply of money for consumers, which effectively sparks increased spending and economic growth.
Economic Policies and Effects
Economic policy represents one of the most important tools that governments have to influence economic conditions and achieve strategic economic goals such as economic growth and prosperity. A significant amount of research and study has been conducted to determine how best to facilitate economic growth in the 21st century. In order to determine this, much attention has been paid to examining economic growth success in some developed economies like the United States and those in the European Union, and those of underdeveloped economies, such as China, India, and Mexico. Ultimately, China and India represent two of the fastest emerging economies, yet these countries remain significantly underdeveloped compared to the United States. Research suggests that there are several variables that have contributed to the disparity in economic development, the most prominent being the time of economy that is implemented within the nation. Specifically, a great deal of research has revealed that a free market economy facilitates much higher levels of economic growth and prosperity than other types of economies, such as communist and totalitarian economies. Communist economies are generally considered closed because they typically seek to limit or exclude trade with other countries in order to rely solely on the nation’s own resources. This can have a crippling effect on a national economy over time. In particular, communist economies are inherently inefficient because the nation only allows the production of goods and services with its own resources. In addition, production levels in communist countries are often established by the nation’s government through a complex systems of quotas in which the government attempts to accurately forecast how much of a given product that will be needed. This type of economy stifles innovation, creativity, and enterprise, which leads to rampant inefficiency, and extremely limited product selections to for national consumers.
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