Economics Essay Example | Topics and Well Written Essays - 1500 words - 8

Economics - Essay Example As a way of influencing the demand and supply of money in the economy, the Federal Reserve use either contractionary or expansionary money policy. Because, the interest rates are low there is a high availability of money supply in the economy as a result, there is moderate inflation occurrence that is currently at two percent. As the Fed chairperson, the use of restrictive monetary policy measures ensure s there is a steady flow of money in the economy during the period (Bartolotti, 2006). This is because restrictive monetary policy ensures that there is a higher level of depository interest rate for commercial banksas it borrows money from the Federal Reserve banks as they keep their reserves at the authorized level. In addition, it is critical to increase the open market operations by ensuring the citizens with extra money to save can invest in it because of the highly expected returns leading to money being drained out of the economy. As a result, the banking institutions will cha nge a higher rate as it lends less money with increased reserve requirement thus, individuals will seek alternatives for seeking funds rather than borrowing money. In addition, the government can make investments with the funds collected from open market operations leading to increased gross domestic product (GDP) growth. With an unemployment rate that is quite high, there is a need to carry out measures that will influence the growth of employment levels in the economy. Concerning, the new classical economists notion on unemployment and inflation, they highly advocate for a stable inflation-unemployment trade-off that is achievable through the Phillips curve. Based on the Philips curve the trade off is achievable on the assumption of changes in the price level in the private sector freely. This is because the Philips curve enhances the relationship between inflation and unemployment because of fiscal and monetary policy changes (Knoop, 2004). Nonetheless, the classical economics ar gue based on the conceptualization that the expectations-augmented in the Phillips curve emphasizes that the unemployment rate should not extend further than the natural level as it could lead to increased inflation rates. More significantly, it is critical to implement fiscal and monetary policies to influence employment levels (Knoop, 2004). This is because the economy is recovering from a recession period and the economy tends to grow with the aggregate demand (AD) increasing therefore, the levels of employment will increase. Even though, there is an increased pressure for a raise in wages after rescission, the rate at which the economy grows is faster, and the wages begin to rises slowly. Based on the Philips curve an outward shift of the aggregate demand AD curve because of increased consumer spending causes the equilibrium level of national output to shift to the point Y2 beyond potential gross domestic product (GDP). As a result, this creates a positive output gap, and it is more preferably attributed to cause a rise in inflationary pressure

Efficient Market Hypothesis Essay Example | Topics and Well Written Essays - 2500 words

Efficient Market Hypothesis - Essay Example Importance of efficient market hypothesis can be identified from empirical implications of it in many pieces of research and studies by empirical researchers. Literature on efficient market hypothesis before LeRoy (1973) and Lucas (1978) was evolved around the random walk hypothesis and magnitude model. These are statistical description of price changes that can be Lo and McKinley (1988) forecasted and initially taken to be implication efficient market hypothesis. The first test of random walk hypothesis was developed by Jones and Cowles (1973), and they compared frequency sequence and reversal in historical return of stocks. They identified same sign of former pairs of consecutive return and the opposite sign of latter pair of consecutive return. Osborne (1959), Fama (1963; 1965), Cootner (1962; 1964), Fama and Blume (1966) conducted tests of random walk hypothesis and supported previous studies of random walk hypothesis using historical stock return. Lo and McKinley (1988) reported that variance of two week stock return is double the variance of one week stock return. They conducted this test on US indexes from 1962 to 1985. French and Roll (1985) identified from their study that variance of stock return over weekends and holidays are much lower than variance of week days, especially first three weekdays of a week. Poterba and Summers (1988) and Fama and French (1988) found out negative correlation in US stocks indexes return from stock return data of 1962 to 1986 actually occurs.... In the process they use different forecasting techniques as well as some valuation methods. The combination of the techniques helps them in their decisions regarding investments. However, the hypothesis states that the techniques are not effective and no one has the capability to predict the outperformance of the market. If the investors enjoy any advantage, it is supposed not to exceed the incurred cost of transaction and research (Timmermann, & Granger, 2003, p.5). Literature review The origin of efficient market hypothesis can be traced back in the studies of two individuals in 1950s. One is Paul A. Samuelson and the other one is Eugene F. Fama. They identified the notion of market efficiency from two different research agendas. Samuelsson’s contribution in the invention of EMH was great, and the researcher summarized that in efficient market, changes in asset (stocks, bonds and other traded instruments) price can be forecasted if these are properly anticipated. This means price should fully incorporate all the information and expectation of all the market participants. In contrast to Samuelsson, Fama concentrated on statistical measures of stock price and resolving the debate regarding technical analysis and fundamental analysis of stock price. This researcher summarized that current price stocks fully reflect all information available to market participants. These two empirical research studies on this critical area of finance have helped many researchers thereafter to develop several econometric single or multifactor linear asset pricing models (Seweel, 2011, p.4). Random walk hypothesis Importance of efficient market hypothesis can be identified from empirical implications of it in many pieces of research and studies by empirical researchers.