US' rate of the population growth will increase the
rate of growth of the workforce/year... Means more demand, investment and
growth... The country's actual, warranted and potential growth rate will
increase... Actual growth rate is what the economy achieves... Warranted growth
rate is what the forecasts say, the projection... And, potential is what is the
economy's capacity. In case of higher population growth rate these all might
go-up... The US does not have an age-limit for education and gap in it...
actually getting degrees, good jobs and good pay-checks... Money may increase
capacity for more children... More demand, more supply will help achieve full
employment... The non-accelerating-inflation-rate-of-unemployment... also means
price-stability, because of the non- accelerating-inflation-rate, words and
meanings... But, when population increases money-supply should increase to keep
wages and income atleast constant... If we will try to pay out wages and income
from the money-supply in the past period it will reduce money-supply in
everybody hands which will also reduce demand because if we assume that more
people have joined the workforce, suppliers will supply more. Then supply
relative to demand will go up, prices will fall, because now there are more
goods and less money, value of money will go up, demand will go up... If this
is the conclusion that prices will fall in the future, especially price of
capital people will delay investment and less and less investment will put the
economy in a downward spiral for a period... Similarly, the fear of higher
interest rates soon may push the investor for investment soon... People view
lower prices as a disincentive for investment, but they forget that lower
prices will help everybody in terms of cost of living... The central-banks job
is to match demand and supply of money by maintaining the right level of money-supply
to keep demand and employment highest (possible) with prices stability in the
economy to achieve highest growth rate to attract more investment and remove
supply-side problems because that will make you capital costly because of
inflation and high interest rates, again a disincentive... The central-bank has
a monopoly over commercial banks to adjust price of capital to suit the
economy... Fiscal or Government policy has the same role, price-stability and
full employment... The economy has several players including the private
sector... No economy can ever be a complete market economy... The US also used
to subsidize agriculture not long-back ... Even oil market is restricted to
export which has alot of potential now after shale... Lower oil prices will
also make incomes in other countries soar and more demand for US exports. According
to Keynes-Ramsay-rule economy should choose that capital-labor ratio which
maximizes the present consumption in a domestic economy... hope it is true for
the external-economy, too... Indirectly he is saying that supply demand as much
as you can, means more supply, which also means lower prices or inflation, the
law of supply... and Keynes always talked about short-run because he said “in
the long-run we all die”... And, lower
prices have a direct relationship with lower interest rate... Keynes was aware
of inflation and international trade... But, until Fisher and Wicksell
real-interest-rate was not known to many and the central-banks later also tried
to manage real variables- real interest rate, real wages... Keynes besides
fiscal-policy was well aware of interest rate potential to achieve-full
employment, but not in the liquidity trap... In the liquidity trap when nominal
interest rate is zero, the banks try to cut down real interest rate by shooting
inflation because when inflation will go up and nominal interest rate constant,
real-interest rate will go down. Higher inflation will reduce real interest
rate. However, reduction in nominal interest rate also reduces real rates. Nominal
interest rate is normally cut to increase spending, but again not after the
zero lower bound... The Fed understands the significance of real variables in
increasing investment but not in increasing private demand... Private demand
will increase when prices will go down and real wages increase... The Fed should
now not commit inflation but deflation which will increase private demand... I
think we are done with the investment and supply side...Now this time for the private
demand.... Mothers are doing their best...
No comments:
Post a Comment