Conor Bruce
November 30, 2010
Econ Commentary 2
It is a well known fact that some regions are having more trouble recovering from the global recession than others. For example, it seems that eastern powers have been able to keep their economic growth, or growth of Gross Domestic Product. GDP is the accumulation of a country’s Consumer Spending, Government Spending, Investment, and Net Imports, and is the numerical value used to calculate one of an economy’s two main goals, Economic Growth. Similarly, Middle Eastern countries seemed to hardly be affected by the rest of the world’s problems. However, North American and especially European governments have felt the need to take action to aid what they hope is an economic recovery. ore specifically, the European Central Bank’s recent 750 billion Euro bailout fund is intended to provide much needed liquidity in the European Markets. The objective is that the new money in the system will be spent within in the system, and follow the circular flow, causing a multiplier effect. A multiplier effect is when new money in a system is traded multiple times within an economic system between firms and households, the value of which each transaction is counted in GDP. Unfortunately, although this should increase the regions GDP, it comes at the cost of the devaluation of the currency. According to Bloomberg’s recently published article, “Euro Falls to Two-Month Low on European Debt Crisis Concerns; Aussie Drops,” “The euro fell to a two-month low against the dollar” because “euro-area policy makers are pushing Portugal to seek assistance from a 750 billion-euro ($1 trillion) bailout fund.” The worry is that the sudden increase in the supply of Euros will weaken the value of the currency when compared to a currency like the dollar. Looking at the graph of the value of the value of the Euro in terms of dollars, it is obvious that such a large injection in funds will cause a shift out of the supply line, and subsequently a decrease in the price of the euro. espite the devaluation of the euro, the previously mentioned multiplier effect well help to boost aggregate demand, which, when observed in the income expenditure model, the shift in the aggregate demand line in such a way that it moves closer to Potential GDP, or GDP at full employment. This is similar to what happens in the US when the Fed decides to buy bonds from the banks in order to add more money into the system, a recently important topic, except the European Central Bank does not have the power to engage in open market operations, or the buying and selling of bonds, but it instead decided to set up the 750 billion euro fund. The article also mentions that although the Australian dollar has remained strong throughout the global recession, it has recently lost value when compared to other currencies. Because the Australian policy makers haven’t made any plans to drastically increase the supply of Australian dollar’s, it is quite obvious that some other factor playing a role in the price of the currency. For some reason, some doubt over the security of the Australian dollar has arisen, which causes confidence, and therefore demand of the currency to drop. A shift in the demand curve of the say, Australian dollar/US dollar market, will cause the price of the Australian dollars to decrease. The Bloomberg also expresses the strong opinion that much of the same affects are being felt in the European counties as well.
This commentary includes an Euro Market and a AuDollar Market as well as an income expenditure model.
November 30, 2010
Econ Commentary 2
It is a well known fact that some regions are having more trouble recovering from the global recession than others. For example, it seems that eastern powers have been able to keep their economic growth, or growth of Gross Domestic Product. GDP is the accumulation of a country’s Consumer Spending, Government Spending, Investment, and Net Imports, and is the numerical value used to calculate one of an economy’s two main goals, Economic Growth. Similarly, Middle Eastern countries seemed to hardly be affected by the rest of the world’s problems. However, North American and especially European governments have felt the need to take action to aid what they hope is an economic recovery.
ore specifically, the European Central Bank’s recent 750 billion Euro bailout fund is intended to provide much needed liquidity in the European Markets. The objective is that the new money in the system will be spent within in the system, and follow the circular flow, causing a multiplier effect. A multiplier effect is when new money in a system is traded multiple times within an economic system between firms and households, the value of which each transaction is counted in GDP. Unfortunately, although this should increase the regions GDP, it comes at the cost of the devaluation of the currency. According to Bloomberg’s recently published article, “Euro Falls to Two-Month Low on European Debt Crisis Concerns; Aussie Drops,” “The euro fell to a two-month low against the dollar” because “euro-area policy makers are pushing Portugal to seek assistance from a 750 billion-euro ($1 trillion) bailout fund.” The worry is that the sudden increase in the supply of Euros will weaken the value of the currency when compared to a currency like the dollar. Looking at the graph of the value of the value of the Euro in terms of dollars, it is obvious that such a large injection in funds will cause a shift out of the supply line, and subsequently a decrease in the price of the euro.
espite the devaluation of the euro, the previously mentioned multiplier effect well help to boost aggregate demand, which, when observed in the income expenditure model, the shift in the aggregate demand line in such a way that it moves closer to Potential GDP, or GDP at full employment. This is similar to what happens in the US when the Fed decides to buy bonds from the banks in order to add more money into the system, a recently important topic, except the European Central Bank does not have the power to engage in open market operations, or the buying and selling of bonds, but it instead decided to set up the 750 billion euro fund.
The article also mentions that although the Australian dollar has remained strong throughout the global recession, it has recently lost value when compared to other currencies. Because the Australian policy makers haven’t made any plans to drastically increase the supply of Australian dollar’s, it is quite obvious that some other factor playing a role in the price of the currency. For some reason, some doubt over the security of the Australian dollar has arisen, which causes confidence, and therefore demand of the currency to drop. A shift in the demand curve of the say, Australian dollar/US dollar market, will cause the price of the Australian dollars to decrease. The Bloomberg also expresses the strong opinion that much of the same affects are being felt in the European counties as well.
This commentary includes an Euro Market and a AuDollar Market as well as an income expenditure model.
http://www.bloomberg.com/news/2010-11-25/euro-trades-near-two-month-low-on-concern-ireland-debt-crisis-will-spread.html