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Managerial Economics Discussion

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Managerial Economics Discussion 4 – 8 ABC 9/17 Question 4 An article on Wall Street Journal tries to find out the difference in the natural and the prevailing rate of unemployment in the United States of America. Prior to the recession which hit U.S.A. in 2007 – 2009, the natural rate of unemployment in this nation was considered to be around 5 percent by most economists. Now this rate has been hiked up to 6 percent. But the official unemployment rate is 8.1 percent. The article tries to find out the reasons behind such a high unemployment in this nation. The article provides further insights in order to quantify the natural rate of unemployment. It also mentions that the challenge is to detect the endpoint of normal unemployment rate and the commencement of the abnormal unemployment rate (The Wall Street Journal, 2012). This is because. employers may hesitate to take in people who have been unemployed for a long time. Officially the unemployment rate is determined by the number of people seeking for a job and not working. The U.S. government is striving to pump in more jobs in the economy but just by doing this will not help in achieving the objective. As mentioned above, the employers must strive to take in people who have been unemployed for a longer time. Also the government should try to provide training to unemployed people in order to get them an alternate job and thereby remain in the market (Ryscavage, 1999). References The Wall Street Journal (2012). Decoding ‘Natural’ rate of unemployment. Retrieved September 17, 2012 from http://www.politico.com/news/stories/1011/65117.html Ryscavage, P. (1999). Income inequality in America: an analysis of trends. New York: M.E. Sharpe. Question 5 Regulations levied by banks play a key function in impacting the growth of an economy. Banking regulations in a nation helps in stifling the growth of the economy. In fact such rules levied by banking and financial intermediaries may make the business community to manage their funds on a short term level rather than a long term level. In fact, such banking regulations help to decrease the creation of jobs. This is because regulations cost businesses and hence may lead to their capacity to hire more workers (Politico, 2012). Banks have diverse powers on the investment and lending rates and accordingly these rates are revised by the banks from time to time. Banking regulations may significantly impact savings and investment (www.occ.gov, 2012). One such banking regulation leads to the decrease in the interest rates on savings thereby discouraging people to save more. Also if the interest rates on loans are hiked up then it leaves lesser amount of money with the general public and this also helps in stifling economic growth. This is because, the more they spend, the lesser is their capacity to save and invest and hence the lesser is the growth in the economy. References Occ.gov (2012). Key differences between national bank regulatory requirements and federal savings association regulatory requirements. Retrieved September 17, 2012 from http://www.occ.gov/publications/publications-by-type/other-publications-reports/Key-differences-document-public.pdf Politico (2012). Regulations stifle economic growth. Retrieved September 17, 2012 from http://www.politico.com/news/stories/1011/65117.html Question 6 There has been severe affects of inflation on the American economy and the middle class population has been seriously impacted by the high inflation rate. Some of the adverse impact of inflation is being discussed here. Inflation forces the amounts of goods and services to substantially increase thereby decreasing the purchasing power of individuals. In fact, it has been observed that the rates of items like milk, gas and real estate prices have registered a record increase of four times in the year 2012 as compared with the year 1978 (The Economist, 2012). The increasing levels of inflation have successfully helped in creating a wider gap between the rich and the poor and this has lead to shrinking in the number of middle class people. Another outcome of inflation on the middle class is that it has successfully registered a decrease in the levels of incomes in households. In fact, it has been found that the median yearly household income level has witnessed a decline from the year 2000 to 2012 (The Wall Street Journal, 2012). The education fee in America has considerably increased and is beyond the reach of most middle class people. Another effect is that it needs both spouses to work in order to maintain their standard of living. References The Wall Street Journal (2012). The Obama years have been brutal on middle-class incomes. Retrieved September 17, 2012 from http://online.wsj.com/article/SB10001424052702303822204577468750027784434.html The Economist. (2012). Creeping inflation. Retrieved September 17, 2012 from http://www.economist.com/blogs/buttonwood/2012/07/economy Question 7 The exchange rate quantifies the external value of dollars in terms of the amount of another currency it can purchase. Augmenting the supply of money results in inflation and decreases the rate of exchange. This translates to the fact that in future the exchange rate of the economy will further fall in comparison with the exchange rates prevalent with other nations as the value of currency declines (Collado, 2010). The change in the exchange rate is inversely proportional to the rate of inflation. A decline in exchange rate is due to a rise in inflation and this explains the fact that the purchasing power available with the general population is low. Businesses will have to cut down on their purchases abroad as due to a lower value of dollar in comparison with the foreign currency value, it will leave lesser purchasing power available with the business enterprises. They are exposed to exchange rate risk as changes in exchange rates may affect their investments adversely (Ryscavage, 1999). References Ryscavage, P. (1999). Income inequality in America: an analysis of trends. New York: M.E. Sharpe. Collado, E. (2010). The shrinking middle class: why America is becoming a two-class society. U.S.A.: iUniverse. Question 8 First and foremost, market fluctuations will be caused by the monetary and fiscal policies levied by the U.S. government as regulations are imposed for the market to recover. This will be attained by either increasing or decreasing the rate of interest. On the other hand, the government spending augments or lessens, and then it will help in controlling unemployment and bring about price stability. The fluctuations in the market rate will also depend on the inflow and outflow of funds between nations. This determines the strength of the currency which in turn affects the strength of the economy of a nation. Prices of goods and services will also lead to fluctuations in the market due to increase of decline in the inflation rate (Collado, 2010). Some indicators of future activities in U.S.A. will be the orders on real capital products, sales of light vehicles and the real supply of money in the economy. Other than these, some other areas which should be monitored to check for future activity is the amount of export orders received, the stock price impacts and the return on investment (USA Today, 2012). References USA Today. (2012). Tracking the pulse of the economy. Retrieved September 17, 2012 from http://www.usatoday.com/money/economy/story/Economic-Outlook/35290148/1 Collado, E. (2010). The shrinking middle class: why America is becoming a two-class society. U.S.A.: iUniverse.