For any macro economic system to describe stability it is necessary to focus on macro-economic stability as a framework that describes the underlying structure of the economy. Real macro economic output can be decomposed into a cyclical component and a trending component, where the trendline of this cyclical component acts as the major indicator of departure from steady economic equilibrium. A varying degree of variability is then incorporated into this macro economic stability framework, which captures both the tendency of prices of goods and services against prevailing economic structures and the potential for deviations from a steady state with the use of fiscal policy tools.
The deviation from a macroeconomic equilibrium can take one of two forms. One can be the gradual movement away from a price level that is above the equilibrium level, which can occur with an unbalanced demand-supply dynamic. Alternatively, a macro-economic stability analysis would see the economy to break away from a trend, which could be driven by sharp price fluctuations on one hand, and structural disturbances on the other. In the former instance, the market price level tends to reflect equilibrium through the employment and production costs being less than the level of inflation; while in the latter, the disturbances could be driven by fundamental factors such as interest rates, which tend to absorb any movements upward towards the equilibrium level.
As the above example illustrates, a macro-economic stability analysis is necessarily coupled with the study of macropricological variables. For example, a key concept of macro economics is the concept of nominal GDP growth. Nominal GDP growth is defined as the level of spending on an item, which is assumed to rise in relation to potential growth in the economy, with the level of money supply remaining unchanged. If the economy is seen to be operating below potential growth in either case, the central bank is forced to stimulate the economy through either a monetary or fiscal policy tool.
Another macro economic stability issue is the balance of trade dilemma. Here, the imbalance is typically viewed as reflecting an excess demand for certain foreign currencies over others. The key concept here is that a country has excessive domestic spending, which in turn drives up the exchange rate against its currency. The central bank is then forced to respond by either buying back the foreign currency, or reducing the domestic price level in order to facilitate trade between nations. The central bank thus acts as lender of last resort.
A crucial aspect of macroeconomic stability is money policy. It is the job of the central bank to set the base rate of interest, which serves as a benchmark for other interest rates, including the rate of mortgage financing. The balance of trade, employment growth, inflation and price level disturbances are all closely watched by the central bank, which tries to achieve a balance of macroeconomic stability. A tightening cycle in either case will usually be accompanied by measures aimed at reducing inflationary pressures. Whether the purpose is to introduce some measure of economic restraint to boost exports, encourage more investment or move to a more interventionist fiscal policy, it is generally viewed in the context of macropricing, as something that is designed to provide a useful guide to determining the state of a national economy.
A further dimension of macroeconomic stability is the condition of domestic demand management. This is closely linked to the macropricing concept of the balance of macroeconomic stability and is closely observed through the so-called demand management services. These include services such as forecasting the demand for certain products or services, providing information on the supply of certain goods or services and evaluating the potential for expansion in the market. In this respect, a key concept is the employment growth indicator. As it turns out, employment growth is closely connected to macro indicators like the consumer price index, inflation and the balance of trade.
Macroeconomic Stability and Economic Resilience: – ppt video – macro economic stability | macro economic stability
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