INTERMED MACROECON Essay Example | Topics and Well Written Essays - 1750 words - 1

INTERMED MACROECON - Essay Example The members in each group are not always ensconced in their respective groups permanently. They can be shifted in other groups. There are three scenarios of funding adjustments. Funding Adjustment if ADF = ASF In this case, the members of each group are not aware of the equality of ADF and ASF. They are aware of their own financial positions and act according to them. The members of Group 2 need to borrow funds to finance their demand. The members of Group 3 look to lend their excess funds. The lender’s and borrower’s needs are met by financial intermediaries1. As ADF = ASF, the excess funds are just enough to fulfill the borrowing needs of members of Group 2. The financial intermediaries do not need to alter the rates of interest as there is no need to encourage or discourage the lending or borrowing. Funding Adjustment if ADF > ASF In this case, the members of Group 2 and 3 are unaware of this inequality but are fully aware of their own needs. The members of Group 2 b orrow funds from financial intermediaries but the funds available are inadequate to satisfy their demand completely. Financial intermediaries raise the interest rates. ... The financial intermediaries lower the interest rates. This raises the ADF and lowers the ASF and the process continues until both become equal. The completion of funding adjustment makes the economy ready to step in output-price adjustment phase after giving any one of the three following scenarios: GDP = APE = ASF; GDP < APE = ASF; or APE < GDP =ASF. Output-Price Adjustments The producers of each domestic output lie in one of the following groups: Group A – firms facing demand at average annual rates that just equal their current average annual production rates; Group B – firms with excess demand; and Group C – firms facing insufficient demand. Output-Price Adjustments if GDP = APE = ASF The members of Group B and C are unaware on this equality and make decisions according to their own circumstances. The producers of Group B raise their prices and increase their output level. The producers of Group C lower their prices and output. As APE = GDP, the excess deman d for the producers of Group B almost off-sets the demand deficit for the output of producers of Group C. Therefore, this equality has no significant impact on levels of employment, output, interest rates, and prices. Output-Price Adjustments if GDP < APE = ASF The producers of domestic output are unaware of this inequality and act according to their own requirements. The excess demand faced by the producers of Group B is higher than the shortage of demand by the producers of Group C by exact amount that APE exceeds GDP. The price rise from Group B is higher than the price cut by Group C. The overall price and GDP rise. This raises the income level resulting in increased demand and interest rates. The economic profits earned by Group B encourage entry in their