International Economics Monetary Theory

Question: Discuss about the International Economics for Monetary Theory. Answer: Introduction The economic performance in the short run as well as in the long run with respect to the macro variables present in the country is studied in macroeconomics. The complex nature and the process in which an economy functions are easily analyzed (Scarth, 2014). Macroeconomics includes the production of goods and services in the economy. In the essay the short run equilibrium and the long-run equilibrium of an economy is discussed. The short-run equilibrium is evaluated in order to understand the issues that the economy faces in the short run. Moreover, the long-run equilibrium is discussed along with the principles and theories related to it. The government of an economy plays a vital role in achieving the equilibrium of the economy. The essay supports to analyze that for an economy to be stable, it is important to operate at an output level where the aggregate demand curve, long run and the short run aggregate supply curve intersects. The essay further analyses the objectives in a systematic manner. The essay at first discusses the aggregate demand curve, the short-run supply curve and the long-run supply curve. The three concepts will be discussed to understand the topic in details. Analysis The consumption expenditure, investment, government purchases and the net exports are included in the aggregate demand curve of an economy. The curve is downward slopping which is expressed by the equation Y= C+I+G+NX. The aggregate demand curve shifts when there is an alteration in the autonomous monetary policy, tax rate, consumption expenditure, and government purchase (Wray, 2015). The short-run aggregate supply curve includes three basic elements. These elements are output gap, inflation shock and expected inflation of an economy. There is a positive slope in the supply curve as the slope of the curve is depended on how fast the price level respond to the changes in the output gap (Stock Watson, 2015). In the case of the long-run aggregate supply curve, the amount of capital and labor required in the production is the determining factor. The availability of resources for the production procedure also affect the long-run aggregate supply curve. The natural rate of output in an economy is vertical. This rate of output is derived from the natural rate of unemployment. In the short run, an economy obtains the equilibrium when there is an intersection of the aggregate demand curve and the aggregate supply curve. There are three types of market in an economy namely the financial market, labor market and the product market (Mankiw, 2014). It is important for every economy to attain equilibrium level in all the markets in order to support the economy to flourish. The aggregate demand and supply model help to determine the various fluctuation present in an economy. The following figure shows the short-run equilibrium: In the above figure, AD and AS1 are the initial demand and supply curve respectively. With the intersection of the demand curve, the short run equilibrium is E1, the output level is Y1 and the price is P1. There is an outward shift in the short run supply curve because of the sudden shock. The supply curve shifts from S1 to S2. As a result of the shift in the SRAS curve, the price level falls from P1 to P2. Simultaneously, there is an increase in the output level from Y1 to Y2. The final effect is the change in the short run level of equilibrium, considering other things remaining constant. In the case of short run, there is minimum one factor used in the production process which is fixed. Therefore, the economy may or may not be able to gain back the stability lost in the market. The government of an economy plays a very important role in the process of bringing economic stability in the short run. The government makes measurable changes in order to bring the situation under complete control. To achieve the objectives, the government exercises different contractionary and expansionary fiscal measures depending upon the situation(Weeks, 2013). The contractionary measures are used to reduce the market output while expansionary measures are used to overcome the deficit in the economys output. Changes in the tax level, inflationary measures, unemployment measures and various other aspects are considered by the government in order to bring the equilibrium in position(Benassy, 2014). The long run supply curve of an economy is vertical. It is important for an economy to choose the equilibrium where the short run aggregate supply curve, long run aggregate supply curve and aggregate demand curve intersects(Gandolfo, 2013). As per the figure, the equilibrium is at the point where AS1, LRAS and AD1 and intersects. There is a shift in the AD curve from AD1 to AD2 due to the change in the fiscal policy measure. Hence, the equilibrium will be obtained at a point away from the earlier long run equilibrium. The price and output level will rise. There will be a new be equilibrium in the short run. As the economy moves towards the long run, the expected price level will adjust itself to meet the actual price level of the firms, workers and producers (Borio, 2014). Thus, the AS curve shifts to AS2 from AS1. Moreover, as a result of the contractionary measures, the opposite happens. However, the economy reaches the equilibrium again in the long run. Hence, in order to attain stability the long run aggregate supply curve, short run aggregate supply curve and the aggregate demand curve needs to intersect at the same point. Conclusion The study helps to understand the way in which economy achieves equilibrium level of output despite the external and internal shocks of the economy. Although the short run equilibrium is affected by the shock, in the long run, the stability is achieved. The output level remains same while the price level changes due to the stability. The government intervention in short run with the help of fiscal policies supports the balancing of total demand and the total supply of goods. Thus, the economic fluctuation is reduced in the long run and stability is gained. References Benassy, J. P. (2014). Macroeconomics: an introduction to the non-Walrasian approach. Academic Press. Borio, C. (2014). The financial cycle and macroeconomics: What have we learnt?. . Journal of Banking Finance, , 45, 182-198. Gandolfo, G. (2013). International Economics II: International Monetary Theory and Open-Economy Macroeconomics. . Springer Science Business Media. Mankiw, N. G. (2014). Principles of macroeconomics. . Cengage Learning. Scarth, W. (2014). Macroeconomics. . Books. . Stock, J. H., Watson, M. W. (2015). Factor models and structural vector autoregressions in macroeconomics. forthcoming Handbook of Macroeconomics, eds. John B. Taylor and Harald Uhlig. Weeks, J. (2013). Book Review: A Modern Guide to Keynesian Macroeconomics and Economic Policies. . Review of Radical Political Economics, 45(2), 240-242. Wray, L. R. (2015). Modern money theory: A primer on macroeconomics for sovereign monetary systems. Springer.