Macroeconomic Essay Example
Macroeconomic theory essay.
Evaluate the theoretical argument that price and wage flexibility allow an economy to correct a negative demand shock. Provide evidence from Japan in the 1990s to illustrate your answer and consider briefly what policy lessons may follow for dealing with the impact of the current world financial crisis.
In the year 2007-2008, the global economy has been suffering deeply from the impact of the major financial crisis. This event is considered the worst of its kind in decades, since the great depression. The cure for this crisis has been the topic of much debate; many economists suggest that the idea of price and wage flexibility can return the economy back to full employment as it could have done for Japan in its slump during the 1990s. The current crisis led to major failures and bankruptcy of many large banks and financial services such as Lehman Brothers, Northern Rock, Bradford and Bingley…and result in a liquidity crisis which reduce demand. This is somewhat similar to what the liquidity trap did in the Japan’s slump. Therefore, once again the argument about price and wage flexibility being the solution for the current situation is consolidated. Thus, how does the flexibility of wage and price correct demand and bring the world economy back to full employment?
A demand shock.
To have a simple view at the situation, we can use the theory of demand and supply. When a negative demand shock takes place, demand decreases, lead to an excess supply. If price and wage are to be flexible, they will decrease with respect to the shift in demand curve; lead the economy to a new equilibrium point. On the other hand, if price and wage are inflexible, they will stay the same, leave a demand shortage in the economy. This demand shortage can lead to a major failure, since price and wage are too high comparing with current demand, firms and companies can not make profit from selling goods and services and can not afford to pay their
Evaluate the theoretical argument that price and wage flexibility allow an economy to correct a negative demand shock. Provide evidence from Japan in the 1990s to illustrate your answer and consider briefly what policy lessons may follow for dealing with the impact of the current world financial crisis.
In the year 2007-2008, the global economy has been suffering deeply from the impact of the major financial crisis. This event is considered the worst of its kind in decades, since the great depression. The cure for this crisis has been the topic of much debate; many economists suggest that the idea of price and wage flexibility can return the economy back to full employment as it could have done for Japan in its slump during the 1990s. The current crisis led to major failures and bankruptcy of many large banks and financial services such as Lehman Brothers, Northern Rock, Bradford and Bingley…and result in a liquidity crisis which reduce demand. This is somewhat similar to what the liquidity trap did in the Japan’s slump. Therefore, once again the argument about price and wage flexibility being the solution for the current situation is consolidated. Thus, how does the flexibility of wage and price correct demand and bring the world economy back to full employment?
A demand shock.
To have a simple view at the situation, we can use the theory of demand and supply. When a negative demand shock takes place, demand decreases, lead to an excess supply. If price and wage are to be flexible, they will decrease with respect to the shift in demand curve; lead the economy to a new equilibrium point. On the other hand, if price and wage are inflexible, they will stay the same, leave a demand shortage in the economy. This demand shortage can lead to a major failure, since price and wage are too high comparing with current demand, firms and companies can not make profit from selling goods and services and can not afford to pay their