The term Conditional Convection refers to the condition of economic activity, in a market where prices can vary conditional upon future state conditions. In simple terms, it is said that the value of an asset cannot exceed or fall below a predetermined limit depending on the condition of the market in the future. An example of such a condition may be seen when commodities are bought at low prices now and sold back at high prices later on. In economic jargon, this is called the “demand-drop” effect.
Convection has become very important in international economics, particularly during the period of financial crisis and economic instability. Economic policies based on Conditional Collision are becoming more prominent in the global economy. These policies are designed to counteract the negative effects of economic growth caused by the accumulation of non-rivalrous assets, demand, and production imbalances. Economic policies based on Conditional Collision aim to provide an environment that is conducive for economic expansion, in other words, the policy will try its best not to let the growth of the economy affect the prices and income levels of the people and other institutions. This ensures the equilibrium of the economy.
For a policy to work properly, it should be able to anticipate two future conditions: the rise in economic output and the fall in the price of commodities. If the former occurs then the economy will grow, and if the latter occurs then the economy will contract. However, these policies are not always possible since the economy can not expand indefinitely and may experience a downturn only periodically.
Economic policies can also push up the demand and the supply of money. It follows that whenever a certain level of money supply is maintained, the economy grows. In a constrained economy, the government pursues expansionary policies to increase employment and economic output. At the same time, it tries to control inflation through controlling the interest rates. These two policies together lead to the rise in demand for goods and services.
The rise in demand for a particular good or service drives up its price, while simultaneously reducing the supply of that good or service. In a situation where the elasticity of demand is high, the price of that good or service drops to the level at which demand is evenly divided between supply and demand. This is a condition of equilibrium in which neither party has excess demand for the good/service over the other, and both parties have enough supply for their own needs. A similar condition of economy occurs when the demand for money falls below the level that it can provide for itself. The central bank therefore has no choice but to stimulate the economy by inflating the money supply to make up for the lack of demand.
Conditional convergence explains how the two leading economic policies of the US, interest rate policy and the federal funds target, converge with each other. When interest rates are falling, economists expect that economic growth will move downward. On the contrary, when rates rise, they think that economic growth will move upward.
As the Federal Reserve lowers interest rates in order to raise inflation, the prices of goods and services will rise. But when the interest rate is lowered, consumers will tend to buy fewer goods and services because they can now afford them more cheaply. The simultaneous decline in demand and increase in supply causes the prices of goods and services to fall, thereby causing inflation. Since inflation reduces the value of the dollar, it reduces the value of the country's balance sheet, which leads to recession.
The condition of demand and supply conditions in the US determines the strength of economic growth and its direction. When these conditions are out of balance, economic growth is unstable. When demand is too high, the economy tends to grow at a rapid pace that is unsustainable, leading to inflation. Conversely, when the supply is too low, the economy tends to shrink as business activity declines. The condition of demand and supply determines the strength of economic growth.
The Convergence Hypothesis: Types and Paths Economic Growth – conditional convergence economic growth | conditional convergence economic growth
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