Ripple effects by economic facts

A detailed Summary of Ripple effects by economic facts

There are several things that can cause a ripple effect in our economy. There are economic facts, or things that will happen no matter what, that start to affect more and more people, until they sooner or later effect everybody. The Keynesian Transmission Mechanism is a good example of something that has a ripple effect on everybody. The Keynesian mechanism has three stages, each of which has an effect on something. The first stage is the increase or decrease in the supply of money (A-1). The second stage is for the investment to rise or fall in conjunction with the change of the money supply (B-1). The third and final stage in the mechanism, is for the total expenditure/aggregate demand curve to shift accordingly to the both the money supply, and the investment. There are also some walls that block the mechanism from working, that have ripple effects on the economy. These include the Liquidity trap, and Interest-Insensitive Investment.

In the first stage of the Keynesian Transmission Mechanism, the money supply is either raised, or lowered by the Fed. They do this by buying and selling bonds to the public. If they buy bonds back, then they are essentially lowering the money supply, where as if they sell them, then

There are two traps in the Keynesian Transmission Mechanism. The first is called the Liquidity Trap. This occurs when the Demand for money is at a horizontal position (E-1). This means that it would not matter if the money supply were to be increased from S1 to S2, the demand would stay the same. Because of this, there would be no change in the interest rate, so investment and Real GDP would not be affected. Basically there would be more money out there, but it wouldn't be as needed. The second trap is the Interest-Insensitive Investment. This means that the investment would not change due to a change in the interest rate. If the interest rate doesn't affect the investment, then the investment would not be able to cause a shift of either left or right of the AD curve. This usually happens if a firm or a corporation is expecting an increase in the interest rate, even though it is low at the time. The corporation will not be as likely to invest knowing that they will get burned later on. Since in either way, you have an increase in the money supply, there will be a result that affects everybody. If the money supply is increased, and the AD curve doesn't shift to the right, then there will be more money to pay to the same amount of employees. The opposite is true, if the money supply is decreased, then there will be less money to go around for the same amount of jobs.

The Keynesian Tr

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Approximate Word count = 949
Approximate Pages = 4 (250 words per page double spaced)

Category: Politics