This document analyses Fed’s policies before, during and after the crisis. We have consciously avoided discussing any related fiscal actions. All the claims made here are supported by appropriate data. However, the intention has not been to provide an exhaustive analysis of each policy action. This article is only intended to provide the novice readers with an introductory reading on the financial crisis and point them in the right direction in case they are interested in doing an in depth study of the same.
Every time there is an injection of new demand into the circular flow there is likely to be a multiplier effect. This is because an injection of extra income leads to more spending, which creates more income, and so on. The multiplier effect refers to the increase in final income arising from any new injection of spending.
The income effect is the change in consumption patterns due to the change in purchasing power and the substitution effect is the change in consumption patterns due to a change in the relative prices of goods.
The Gini coefficient is a measure of the inequality of a distribution, a value of 0 expressing perfect equality where everyone has equal shares of income and a value of 1 expresses maximal inequality where only one person has all the income. It has found application in the study of inequalities in disciplines as diverse as sociology, economics, health science, ecology, chemistry, engineering and agriculture.
Special drawing rights (SDRs) are an international reserve asset, created by the IMF in 1969 to supplement its member countries' official reserves. Its value is based on a basket of four key international currencies, and SDRs can be exchanged for freely usable currencies. In short, SDRs are supplementary foreign exchange reserve assets defined and maintained by the International Monetary Fund (IMF).
The World Bank defines foreign direct investment (FDI) as the net inflows of investment to acquire a lasting management interest (10 percent or more of voting stock) in an enterprise operating in an economy other than that of the investor. In a broader sense, FDI consists of the acquisition or creation of assets undertaken by foreigners on a long-term basis.
Auction theory is exceptionally relevant today, as it sets the theoretical backbone of auctions with major financial implications like allocation of licenses, or privatization of public sector companies etc. It analyses various auctioning methods on the basis of their efficiency, the revenue they generate and the equilibrium bidding strategies.
The endogenous growth theory argues that economic growth is generated from within a system as a direct result of internal processes. More specifically, the theory notes that the enhancement of a nation's human capital will lead to economic growth by means of the development of new forms of technology and efficient and effective means of production.
Markets with asymmetric information are those situations in which one party in a transaction has more or superior information compared to another. This could lead to a harmful situation because one party can take advantage of the other party’s lack of knowledge.
Inflation is defined as an increase in the price of a bunch of Goods and services that project an economy.It is measured as an annual percentage increase. As inflation rises, every dollar you own buys a smaller percentage of a good or service.
Convertible currencies are defined as currencies that are readily bought, sold, and converted without the need for permission from a central bank or government entity. Most major currencies are fully convertible; that is, they can be traded freely without restriction and with no permission required. The easy convertibility of currency is a relatively recent development and is in part attributable to the growth of the international trading markets and the FOREX markets in particular.
Quantitative Easing (QE) is a term very often in the news in recent times. It is a monetary policy that is used by governments to increase money supply. It is an unconventional system and is usually used only when the conventional methods of increasing money supply have become ineffective. It was first used by the Bank of Japan in early 2000’s to fight domestic deflation. More recently, it has been employed by the USA, UK and the Eurozone during the financial crisis of 2007-2010.
We all know that the Central Bank controls the money supply in a country, but how does it do so? Through the course of a simple exercise, we shall illustrate here how the banking system, through the fractional reserve system, creates money. Though there are other factors at play, for simplicity’s sake we shall assume that only two instruments are at work through the course of this exercise: the required reserve ratio (RRR) and open market operations (OMOs).
The Keynesian Multiplier helps one understand the process of creation of wealth in a nation. When one rupee is earned in a country, that implies that the GDP of the country rises by more than one rupee through the multiplier effect.
One of the key problems with a country adopting a fixed exchange rate is identified clearly by thee concept of the Impossible trinity. The Impossible Trinity is a concept that states that a country can have only a maximum possible of two out of three macroeconomic measures : a fixed exchange rate, an independent monetary policy and free capital movement across borders. Let us see how this works.
There are three types of Exchange Rate(ER) mechanisms: 1. Floating ER – no intervention by governments or central banks 2. Fixed ER – officials strive to keep the ER fixed (or pegged) even if the rate that they choose is not the equilibrium rate. 3. Managed Exchange Rates - fall in-between these two categories
Balance of payments accounts are an accounting record of all monetary transactions between a country and the rest of the world. These transactions include payments for the country's exports and imports of goods, services, financial capital, and financial transfers. Sources of funds for a nation, such as exports or the receipts of loans and investments, are recorded as positive or surplus items. Uses of funds, such as for imports or to invest in foreign countries, are recorded as negative or deficit items.