Question

2. Monetary authorities.

In the Eurozone, which institution oversees monetary policy, and which one controls fiscal policy?

The main goal of the European Central Bank is controlling inflation. Why it is so important? To answer this question: define aggregate demand and aggregate supply in the long-run and short-run (use graphs), and explain the main effects of rising prices in the economy using the concepts delivered in class.

500 words max

Thanks!

Answer 1

Monetary integration exists in the euro zone and therefore the European Central Bank controls monetary policy. The region is without a tax union. Fiscal policy is primarily the national interest of a nation in the area, but within the European Union, there are still some very limited tax authorities which set VAT and import tariffs. The question of fiscal union remains a proposal in this zone.

The reason why inflation is controlled is important because inflation rates have an impact on the interest rate. Nominal rate equals real rate and interest rate, which means borrowing money is expensive. This increases investment, i.e. a reduction in investment due to higher interest rates which lower income. Manual spending is under threat. Inflation could further increase, which could hinder exports to a nation. Therefore, inflation can raise the economic well-being of nations and the whole Eurozone.

AD is the economic aggregate demand for goods and services. As revenue is higher, AD is higher, whilst AD is higher prices. As a result, both in the short and long term, AD is decreasing. The AS is the aggregate amount of the economic goods and services produced and delivered. It depends on what the AS is. When prices are perfectly flat in the very short run, then AS is horizontal, the intermediate run prices are slowly adjusting, and the AS is upward, showing that prices are rising, the AS is rising. While long-term prices are perfectly flexible, that gives us a vertical AS.

Rationale for why rising prices increase the cost of living, hamper economic growth and reduce economic output:

1. Purchasing power deterioration: decreasing the value of holding capital by cost , i.e. inflation. The cost of buying a good thus increases with rising prices not only nominally but also in real terms. That means the same money that had previously purchased x number of goods; purchases less than x number of goods after inflation.

2. Degrading investor confidence: Central banks are implementing counter-contractionary policies that raise interest rates as inflation increases. This discouragement of borrowing and discouraging investors from saving as returns is less a product of higher interests.

3. Reduction of aggregate output: Real wages fall as prices rise. Workers eventually demand higher wages which involve higher supplier costs. This increased cost leads to lower output rates and thus lower aggregate supply rates