Economics

Economics is the study of how individuals and groups allocate their limited or scarce resources to best satisfy their wants, needs and desires or simply put their demands. Scarcity refers to the tension between our limited resources and our unlimited demands. The study of economics revolves upon the principle the higher the need, the higher the demand.

Comparative advantage is a situationin whicha country, individual, company or region can produce a good at a lower opportunity cost than a competitor. Absolute advantage is the ability of a country, individual, company or region to produce a good or service at a lower cost per unitthanthe cost at which any other entity produces that good or service. The pattern of trade is best determined by comparative advantage (you export the good in which you have a comparative advantage). An entity or country should sell goods that other entities or countries at a higher relative cost that it does and buy those goods those other entities or countries are willing to sell at a lower relative cost than it has. To make it simpler, buy low, sell high

The most common argument in favor of trade restriction is the infant industry argument. This argument states that developing countries do not have the strength to compete with fully developed countries in the international market. Thereby, the infant industry is protected against foreign competition if trade restrictions are set. Another argument that supports trade restriction is the protection of a country against possibly negative products. A counterargument for trade restriction is that outsourcing of jobs to other countries which could result to thousands of people losing their jobs which could result to economic devastation. Another argument against trade restriction is that it includes costs that could cause economic inequality among nations, giving power to bigger corporations and could put smaller companies out of business.

Q1)
Output (Q)FCVCTCAVCAFCATCMC010001000---11003013030100130302100501502550752031006516521.6733.335515410010020025255035510015025030205050610023033038.3316.675580710032042045.7114.286090

Q2)
a)
WorkersCaps (Q)Labor Cost ()Material Cost ()Variable Cost ()Total Revenue ()Marginal Cost of Caps ()14561685622428011560180602403001

b) It is sensible to operate at a loss with 14 workers because the price is greater than the average variable cost and the firm is minimizing losses because it is covering its variable costs and some part of its fixed costs.

c) It would be better to operate with 15 workers because the average variable cost is constant at 4 and employing one extra labour is resulting in an increase in the output. So as long as the marginal revenue is greater than marginal cost, the firm should keep adding one extra labour.

Q3)
a). There are diminishing returns to labour for 3_workers .
b) Three workers can produce 115 pizzas per day at a total cost of 850.
c) When the second worker is hired, the marginal cost is equal to 150 .

Q4
a) If the firm hires 7 workers, the marginal product is 3.
b) Beginning with the 4th worker, the firm will experience diminishing marginal returns to labour because the marginal product starts to decline.

Q5
a) The long run average cost curve is different from a short run average cost curve in the sense that in the long run, all of the input combinations are flexible and none of the factors is fixed. The basic premise of the short run average cost curve is that at least one factor is fixed and the firm has to cover that fixed cost no matter what, even if it shuts down.

b) The long run average cost curve and the short run average cost curve are related because the long run cost curve is the envelope of the portions of the short run average cost curves and is U-shaped. Each short run curve is tangent to the long run average cost curve and each point of tangency shows the least-cost way of producing a level of output.

Q6
a) I would recommend Tie-Dyed T-shirts to continue production because even though it is incurring a loss of 5, the average revenue is greater than the average variable cost and the firm is minimizing losses. In case of shut down, the firm will have to pay the fixed cost of 10 which is greater than the loss incurred if the firm continues business.

b) Taste Freeze Company should shut down operations because it is not covering its average variable costs and the loss to bear would be 3 which is the average fixed cost. In case of continued operations, Taste Freeze will have to bear the loss of 6 which is more than what the company will have to bear in case of shut down.

Q7
a) It is possible for a firm to maximize profits and yet incur a loss. In a perfect competition the profit maximizing position is where MRMC and if the price is less than ATC but greater than the AVC, the firm is better off to continue production in the short run even though the profit is negative.

b) The firm will be willing to operate at a loss because the variable costs are being covered with revenue and some portion is still left over to apply towards fixed costs. The firm is actually minimizing losses in this situation.

Q8
a) The short run marginal cost curve initially decreases to reflect the productivity of the variable resources employed. This means that each variable resource is adding more to the output than the last one and the firm is experiencing increasing marginal returns. As more variable resource is added, the firm experiences diminishing marginal returns as each extra variable is adding less and less to the total output and thus the marginal cost increases.

b) Marginal cost is the cost of one extra unit. When marginal cost is below average cost, average cost is falling as output increases. When marginal cost intersects average cost, the average cost is at its minimum. As marginal cost starts rising, so does the average cost. Hence marginal cost and average cost have a direct relationship and they follow the same pattern.

Q9
a) Marginal revenue is the revenue generated from selling one extra unit. In a perfect competition, a firm is a price taker and hence cannot change the price. So if one more unit is sold, the firm cannot manoeuvre the price to generate more profit and the total revenue will change by the amount that is equal to the constant price only. Thus the marginal revenue is equal to the price.

b) After hurricane Andrew hit south-eastern USA, the demand for ice surged both in the short run and long run. This is because the water and electricity systems were completely destroyed and ice was used as a means to generate water and became one of the basic necessities. Since the demand shot up, the price also increased drastically since supply could not match demand.

Q10
a) When a firm long run average cost falls as output increases, it is experiencing economies of scale.

b) Diseconomies of scale happen generally when the firm expands and as the output increases, so does the long run average cost.

c) When the long run average cost does not increase or decrease with changes in the firms size, the firm experiences constant returns to scale.

1. Fed uses different techniques such as the required reserve ratio, open market operation and discount rate in order to control and shrink the supply of money.

REQUIRED RESERVE RATIO Fed makes an impression on the supply of money by made changes in the required reserve ratio. One should know the fact that financial institutions hold certain percentage of all deposits on reserve. This move shrinks and reduces the amount through this banks expands the supply of money in the market.

OPEN MARKET OPERATION When we use the term open market operations, it refers to the issuance or sale and purchase of treasury bills  government securities to the public. It is a tool used to expand or contract the amount of reserves in the system and thus the money supply.

DISCOUNT RATE The rate of interest that Fed charges on banks over their short term loans. Discount changed and modified according to the rate of federal funds.  

2. The changes that they made are stated below
If fed reserve ratio increases the deposit multiplier will be smaller due to this Fed takes an initiative by reduces the money through which bank expands the supply of money in the market. Fed also takes other initiative such as reduces the supply of money by made an inclined in required reserve ratios.

Sold securities in the open market due to this practice the decrement in the banks reserve means the supply of money also declines. In short, sell securities and contracts the money supply and also the reserves of the commercial banks.  

Increment in discount rate makes an impression on the federal reserves. When the interest rate increases people tends to take more loans for the investment purposes and also saved their hard income money in the fixed deposits in order to get better return on their investments.  

3. The changes that they made are stated below
If fed reserve ratio decreases the deposit multiplier will be larger due to this Fed takes an initiative by increases the supply of money through which bank expands the supply of money in the market. Fed also takes other initiative such as reduces the supply of money by made an inclined in required reserve ratios means now bank in a position of excess reserves and uses these reserves in issuing new loans.

By using and effective open market operation resulted on the expansion and the contraction of the money supply.

Decrement in the discount rate shakes the economic growth due to which recession prevails in the economy.

4. In todays prevailing economic situation bank uses an effective and flexible monetary policy in order to increase the supply of money. The changes would be
By adopting the lower discount rate which increases the supply of money.

Uses the strategy of lower required reserve ratio resulted in the increment in the supply of money.

Another technique is to use an appropriate and effective open market operation in which fed purchases the securities means money is giving back to the public which in the end increases the supply of money.

On the whole, it is recommended that fed must uses more open market operation due to the above mention reasons.

YEAR
QUANTITY
PRICECDtennis racquetCD pricetennis racquet price
2005
9018
018100
2006
10019
020110

Calculate real GDP for 2005 and 2006 using 2005 prices. By what percent did real GDP grow

REAL GDP

(9018)  (180100)  19620
(10018)  (190100)  20800

Growth of real GDP  20800-19620  19620 100  6

Calculate the value of the price index for GDP for 2006 using 2005 as the base year. By what percent did prices increase
Price Index 2006  2080019620100  110.1
Growth of Price  110.1  100100 100  10.1

Now calculate real GDP for 2005 and 2006 using 2006 prices. By what percent did real GDP grow

REAL GDP
(90200)(180110)  21600
(10020) (190110)  22900
Growth of Real GDP  22900-2160021600100  6
Annual Gross Domestic Product (2000-2009)

YearGDP20009,951.5200110,286.2200210,642.3200311,142.1200411,867.8200512,638.4200613,398.9200714,077.6200814,441.4200914,258.7

Given above is the date of U.S GDP figures from years 2000 to 2009. We will analyze the data with the aid of a graph.

Below is a line graph that shows the movement of the gdp. In the years 2000 to 2003, the U.S GDP is continuously increasing. 2001 was a remarkable year because a new president George W. Bush took the highest seat. He was very popular during his first term because he enacted many economic and health reforms. These can be assumed to have enlightened the economy of U.S, eventhough they faced the terror of the September 11 attack.

At this times, U.S also improved much on international trade specially with the overtake of Afghanistan and the seizure of Iraqi president Saddam Hussein. These have all increased American power around the world.

The 2007-2009 figures are low as the financial crisis hit the economy. The problem of subprime mortgage has backfired against many large U.S financial institutions, thus the graph shows a decline in the GDP figures from 2008 to 2009. This financial crisis was predicted by U.S economist Nouriel Roubini.

Intense competition yields to regulation changes in the airline industry. Most regulations improve and increase the profit margin in the industry, for example, primary regulatory insures that, every airline should operate on a more public interest.  According to the safety standards and procedures, the introduction of deregulation has brought an increase of growth in the airline industry. Some of the countries, which have less effect in deregulation of competitors, face increase in competition from the other competitors. The unrestricted cost paid by businesspersons creates arguments leading to the introduction of hub-and-spoke. This allowed airlines to connect thus reducing much competition. The impact of policies on competition had effects, which included the central policies, which identify the boarding facilities, and the antitrust policies thus ensuring that the market is not congested.  The Regulatory Centre notices that when the landing charges are increased, the customers suffer a lot. For this reason, the various transport ministries refuse the proposal and encourages the management team sort out the problems. Although there are disagreements, various transport ministers base it on the increased cost. Multiple competitors brings along different results. It may develop pressure in the competitive industry and no change might be felt at all. This depends on the existence of credible potential competitors challenging your airline. If there is an airline firm that has collapsed, then this will reduce the aggressiveness of the other competitors because the industry is to some extend oligopolistic.

The current competitions on all airline routes are of caused by the different regulations such as the nature of airline competitors, policies available and the market aggressiveness. Most airlines competitions diminish due to poor management thus leading to increase of airline transport cost to increase cost. However, this is avoidable if the regulations are adhered. In addition, if the market had high competition, most airlines would try to reduce there a fare. The increasing attention of the Fair Trade Commission of Japan (FTCJ), acts promptly, thus promoting competition. During the month of September 11, the airline industry had an extreme economic effect, because deregulation affected clients thus leading to a decrease in the passengers demand thus increased cost. However, before the deregulation was brought, the Department of transportation (DOT) held that any airline that was considered good condition was allowed to fly to any domestic route. Competition changes were made in the (DOT) through primary regulatory role, which checked whether the airlines were operating on the public interest or with accordance to the safety standards and procedure.

Most international airline routes have been deregulated through open talks, which pave way for the airlines to fly to any destination. With this agreement, they lack competition in the market because some passengers are allowed in the United States of America and vice versa. Federal regulations that affect certain airports include Federal slot Regulations, which helps to avoid crowding in the airports and allowing an aircraft to land or depart.

The basis of airline competition
In Figure 1 the introduction of deregulation in the U.S.A airline industry has led to its extreme growth. The table above shows the airline passengers for both U.S and Canada for the last 25 years. Canada had a fewer competition towards the U.S. When it deregulated, it increased to a rate of 80 hence combining competition and deregulation which triggers increase in the airline industry.

In Figure 2 in both U.S. and Canada, price seems to be the same for a period although the price for Canada does not change. U.S. has had a steady drop meaning that the customers have gained through the decrease of transport charges. Though there is decrease in the U.S. transport charges, the unrestricted cost paid by business persons travelling tends to rise thus leading to an argument that airline have not gained. Due to this, most airlines started to operate on a hub-and-spoke system, which allows airlines to connect. These airlines included the united hubs, examples Chicagos OHare, Denver, and Washingtons Dulles. Precipitating exits may influence the rate of profit margin in the airline industry. This is because most airlines cost depends on the amount of labour and fuel, which are stable for a short, while.

The effects of policies on competition
Due to both competitive and deregulated industry mix, most policies may affect the competition such   policies include Central policy choice, which is used to identify boarding gates and facilities although many airlines still really on the non-market mechanism. Having this policy helps in changing increase in competition between the airlines and sometimes gives the airport authorities higher traffic intake when the cost is lower than the bid.

Antitrust policy increases the airfares affecting the consumers in the market. However, most consumers benefit from the congested market through the expanded networks of frequent and more accommodating airplanes. A third significant policy dimension includes denial of foreign ownership of airlines and other domestic flights. Accepting foreign ownership increases competition to the owner and denies other countries. This safety and regulations help to stabilise the competitive market. For example, for Canada to get the hub-and-spoke economy of scale they may need to develop lesser competition.

Competition Policy study Center
The last fifteen years has seen Japan incur several changes gradually in its industry. Years back in the 1986, air routes had regulations. Looking at Japan Airlines (JAL), the International routes were covered included also the domestic major routes which was served also by All Nippon Airlines (ANA) its competition. Both ANA and Japan Air System (JAS) covered domestic local routes although the individual routes and flight capacity was subject to approval. There was also strict regulation of airfare according to the approximation of the route distance.

During the year 2003, the airfares were variable just like those in the U.S. although they were approximately appropriate to the distance. Day of the week, season, day, and most important the competitions in the route are the various reasons why there are fluctuations or differences in airfares. Apart from the difference in airfare, there has been increase in airlines in the market this is so because of the deregulation. This has led to more competition in both the domestic market and major international routes.

Most major countries airlines have been failing in business and most are being restructured now. The increase in the landing charges increased the airfare for JAL and ANA to cater for the charges although it was going to affect the customers. However the Japanese Transport Minister, refused  the proposal saying that the increased charge should be obtain by efforts of the management JAL and ANA retaliated by saying they would defer the increase of airfare by two mouths. Although it seemed the Ministers deny of JAL and ANA to raise fare was due to the cost increases.

In the year 2002, JAL and JAS focused on how they could become as one. The international market could not be interfered with this move. This move was to pose a challenge to ANA thus changing the competitive domestic market. On the fifteenth of 2002, it was brought to notice by the Fair Trade Commission of Japan (FTCJ) that most companies would loose market and collapse. For this reason the collaboration between JAL and JAS will benefit them much on the profits because of there own price decision making. In addition, competition would reduce due to the reduction of other competing flights. The merge between JAL and JAS could bring congestion in the airports this denies the airplanes there rights and check in to counter space. Finally, the FTCJ rounded it up and found out that after all of that, the consumers were the ones suffer (Ito, 2003). Later JAL and JAS forwarded a revised proposal to FTCJ, which was satisfactory and was accepted. The names of JAL and JAS remained, there routes were rearranged to divide the market and they were under the common stock holding company.

Another airline to enter the competitive market was Air Do (ADO). ADO had a lot of difficulties coping up with the competition, in that it led close to its failure. Though ADO was almost stopping its services, ANA offered to assist. Through affiliation a code number on ADO flights, purchases of seats in ADO flights helped in the maintenance of its flights. The merge and affiliation, lead to a reduction between the competing airlines.

The next  airline to enter the market in 1998 was Skymark Airlines. After two years, Skynet Asia Airways (SNA) enter plied ed the market for routes between Tokyo-Miyazaki. Getting into the market with a lower price developed competition to the other airlines. Due to that competition, it led to the reduction of airfare in the routes that JAL, JAS and ANA airlines shared with SNA. In order to remain in the market, JAL, JAS and ANA proved competitive by placing offers and discounts to the routes SNA entered. Although there was high competition in the market and the reduction of airfares increased, FTCJ felt it wise that the price reduction could violate the prohibition of monopoly. Though the most used and convincing technique to win the market over the competitors was reducing the price benefiting the consumers, that was not the case. An alarm was raised and immediately caused an impacted leading to increase in the airfares. To survive competition in the airline market by new entrants requires the implement of the competition policy and pressure in the market. This can be done through fair competition. Example of unfair competition include, reducing the discount airfare, this reduces competition in the air routes.

In the European Airlines, does Multiple Competitions lead to a decrease in competitive pressure
Multiple competitions may reduce competition in the market. The competitive pressure may not happen or might level it all depends on the situation. The competitive pressure may not be felt if there is no existence of credible potential competitors to challenge back. According to the theory of multipoint, the fact of Mutual Forbearance (MF) might reduce the pressure of competition between the two industries. Multipoint competition may be said to be meeting same rivals in different regions or areas. (Renaud, M et al. 2007). Most people came into an agreement that during certain times, multipoint competition may bring up MF and to better production.  Saddlers result puts the multimarket as equal if all the sections were similar.

Although Mutual forbearance suggests that the rate of rivalry between the multimarket competitors becomes weak, there will be increase in the multimarket thus reducing the aggressiveness of both the competitors. There is a possibility of a firm to diminish, this may bring about an increase in multimarket contacts thus reducing the aggressiveness of the competitors or Vis versa. The result of the MF behaviour, multimarket firms can tend to be more aggressive towards single or a few markets. Also due to the familiarity between airlines to multipoint competition, it may trigger attacks against rivals who meet in the market.

In the competitive market, it is rear to find new airlines joining. Reason being there are multimarket contacts between airlines thus for new airlines to enter, multimarket contacts should be low. Maintaining competition is a heavy task but some how an airline might accept some other airlines certain opportunity like offering use of landing slots to them, letting them use certain facilities in the terminal building this for a while may invite other airlines to enter and thus maintain competition.

Conclusion
In order to have fair and just competition, the airline must follow and adhere to the regulation and conditions put for them. Practicing what has been stated, example FTCJ cautioning airlines not to reduce there airfares will help maintain competition in the market and avoid the new airlines to enter and exit at there own will. Competition also involves how aggressive and loyal the airlines are. The more aggressive an airline is, the possibility of it with standing the competitive market becomes high. In addition, if the airlines management understands the various policies, it will also contribute to its performance in the market.

The introduction of multiple airlines has brought different changes in the competitive market. One can say that the market has increased in the rate of competition for those who have the better quality services and flights while others can say that the market has been stabilised. To win the market, the airlines must offer the best services, always be time cautious the exit and entrance of airlines must be speculated and met on time. The flights must also have a reasonable price or airfares that every person can be comfortable.  If the airlines can respond positively to these problems then they may end up being the market leaders in the competitive market.

In the increase of multipoint competition, familiarity of airlines could trigger attacks against the competing rivals who meet in the market. Of late airlines run on there own putting there own prices and domestic routes according to the market condition although the non-market mechanisms still controls the boarding gate. The frequent changes in profit mostly in the U.S. has not brought any difference in growth i.e., there has been a steady growth, decreasing prices, and less concentration.

A straightforward connection of the US economy and some economic principles that may help aid the downturn of the US Economy, this paper hopes to give justice on some principles that the government may lessen or increase use.

In any decision that involves two or more options, a person deals with an opportunity cost. Often times the cost or value of a given good or service is considered of in monetary terms.

Opportunity cost in a particular decision is rooted on what must be given up as a consequence of that decision. In other words, opportunity cost may be thought of as the benefits or advantages that one could have gotten if an alternative action were taken. This is an important principle to consider in an economy as it helps guide the system in work.

One side of economic models is known as Capitalism. Capitalism is simply the type of social system where the economy is separated from the state. In capitalist systems, governments have no involvement in economic activities at all. Private ownership of properties best describe capitalism and every one are allowed having their businesses in a free market. In a capitalist society, it is believed that the sole purpose of the government is to protect the people from fraudulent activities. Suffice to say, capitalists usually are simply for profit.

On the other hand, socialism is like the exact opposite of capitalism. The government plays a major role since it owns the social properties of the country. Even though most properties are government-owned, the resources in a socialist society are controlled and used by the peopleworkers, not only by the ruling elite. The laborers have the power to control the economic productions that will benefit everyone in the society. The major difference between these two systems is that in capitalism profits are highly regarded whereas in socialism the relationships between the people in order to attain the common good for their society is utmost taken into account.

The distinctions and comparisons between the two, a principle would arise from a capitalist point of view. This principle would not work in socialist construct as explained. The invisible hand principle is quite easy to comprehend. It was coined by Adam Smith who deemed that the market works instinctively like it is being guided by an invisible hand. No central control or direction is necessary. The free will of all those involved in the market (producers and consumers), act according to their own interests but in turn also benefits the society as a whole. This however will be opposed by some, for reasonable explanations as with what the US government faces recently in its economic recession.

The US government faced huge problems as it hit an economic recession coupled by growing budget deficits. The Obama administration embarked on a journey of historic proportions facing what could be the worst economic crisis since the great depression. The government faced problems in all major sectors of the country especially the financial sector. After the first troubling months of this awful economic slump, the US government gets a hold of the situation and slowly shields the other sectors that needed some help. But the increasing budget alterations for the economic reconstruction have its own downside, steadily increasing the budget deficits with the economic stimulus. The economic stimulus was a double edge sword -It slowly but surely made impact on the economy as well. However, the US government was in a place that it chooses between two evils that if failed, would bring about catastrophic economic results.

In theory, it would be the best to create stimulus packages for the economy to slowly blossom once again. The government would need to be invasive in the economic crisis with this response but would help the economy to reduce the slump if not put a brake to it. Though it helped the economy today, if continued, it would then be the cause of another crisis but now caused by budget deficits. The economy must be put in a state of balance between those two or else, the crisis may again hit the biggest economy in the world.

The level of involvement by the government should be controlled. The economys functions will be very much affected if the government would take more control than the fiscal policies and other tax incentives it gives out. The main program that can be controlled efficiently is the tax programs. The use of tax incentives for individuals and corporations should be maintained in a minimal level. That way, it balances with the deficits of government funds.

The US Government is bound to pursue these economic principles as to regain the footing of the biggest economy in the world- rising once again, to be stronger than ever.

Europes Banks Tighten Credit, Frustrate ECB, written by Brian Blackstone and Nina Koeppen at The Wall Street Journal, primarily sheds light upon the prolonged after effects of the recent global financial crisis that has crippled economic growth across various regions. Stock markets across the world dipped sharply, well-established financial institutions either went bankrupt or were sold off while even the most richest and wealthiest of nations were forced to formulate aid packages to help stabilize their national financial systems. This report will attempt to provide a brief economic description of the global financial crisis while simultaneously providing specific reasoning behind the present credit policies of the financial institutions within the European Union.

From an economic perspective, the major promulgator of the global financial crisis was the bursting of the United States Housing Bubble that primarily reached its full status during the period 2005-2006. In accordance with the growth in the prices of residential sectors within the United States as well as a considerably low interest rate, financial institutions initiated the practice of the provision of incentive based loans such as providing easy preliminary terms and conditions as well lower interest rates to entice households to purchase mortgages. However, once interest rates began to rise and housing prices dropped, refinancing of these particular loans became extremely difficult and consequently, during 2007 as defaults and foreclosure became common, major financial institutions and corporations as well as the average consumer who had invested billions of dollars in order to advocate the provision of these loans began to report major losses. From that point onwards, due to the inexplicable linkages of global financial corporations based within the United States in accordance with the large amount of foreign investment, the world entered into a recession of which the impacts are being witnessed even till today in the form of high unemployment, inflation and weakened financial systems across the globe.

The European Union, in accordance with its inherent link with the United States, also fell victim to the financial crisis and consequently had to take necessary steps in order to curb its most adverse impacts. Throughout 2009, the region has witnessed considerably slow recovery compared to other nations hence it is apparent why, even after the valiant rescue attempts of the ECB, major financial institutions and corporations within the European Union are extremely wary in terms of their credit policies. In essence, the article primarily discusses the fact that although the ECB has stressed upon financial institutions to relax their credit policies, private sector lending is still extremely low and this will eventually have extremely adverse impacts upon the economy in the sense that economic growth, specifically in regards to consumer demand and supply, will be lethargic.

The major crux of the ECBs policies, placed in simple explanatory terms, lies within the context of the principle that financial institutions, by relaxing credit policies and providing loans to the private sector, will eventually stimulate the economy in the sense that consumer spending will increase while simultaneously businesses will flourish by producing more goods and services. In this regard, German Chancellor Angela Merkel said The economy can only get going if credit supply is sufficient. (Blackstone and Koeppen) Stimulation of the economy is also extremely important in the sense that, as of December and mentioned specifically within the article, the European Unions unemployment rate reached an alarming 10 (Blackstone, and Koeppen). Considering this from a supply and demand perspective, it is apparent that if consumers will not have the ability to receive adequate financing, demand for goods and services will not flourish and eventually the economy will suffer as whole.

Economic reasoning behind the actions of the financial institutions within the European Union can be found when considering the fact that the recession had resulted in a major dip in global as well as domestic demand for goods and services. Hence, it would make sense for the banks not to provide loans in the face of low demand. However, in depth research of the economic outlook of the European Union as well as other regions of the world has shown that demand is starting to pick up as the recession is nearing an end. Also, in accordance with the information provided within the article, it has been stated that banks have tightened credit because of the new laws of the ECB regarding capital. However, it must be noted that the new laws were specifically designed to initiate a boost in capital reserves in order to stimulate the flow of credit, not to hamper it.

Inflation within the European Union has also been contained, well below target levels, which inherently has kept interest rates low as well. This primarily points towards the fact that the economy at this point in time requires an injection of capital, within the private sector, so that unemployment can be countered, household income can rise which in turn will entice people to spend on goods and services thereby stimulating domestic demand and eventually facilitating the flow of growth within the economy. The wariness of banks, in regards to loans, is understandable especially since global financial links in accordance with major investment in the United States Residential sector led to the recessionary period that impacted almost every nation within the globe. However, it must also be noted that the only way to stimulate the economy and to fund deficits appropriately, is for banks to inject credit thereby inducing the average consumer and private corporations to invest in government T-bills as well as domestic goods and services which will eventually lead to a higher GDP and a significant reduction in the unemployment rate of the European Union.

From the above discussion so far, we can conclude specifically that although the European Union is on its way to recovery, the foreseeable future looks extremely uncertain in the sense that the entire integration of the financial system of the various nations within the European Union will have to work with cohesion. Supportive fiscal and monetary policy will be required as well as the fact that global demand for imports has dramatically dropped and this will inherently impact upon the export sector of the European Union. However, rescue attempts by the government has primarily put a stop to the fall in private consumption, for which the banks have to play their part as mentioned in the context of the article under review. Consequently, though public spending has risen over the last 6 months, household consumption has primarily remained the same.

Unemployment, on the other hand, will remain high though several rescue attempts are being formulated such as private corporations following policies, in accordance with rising costs, of hoarding labor which primarily dictates firms to cut down on worker hours rather than the workforce. This policy, however, will enable firms to maintain the same amount of workforce even when economic growth picks up because they will primarily rely on meeting the possibility of rising demand by the amount of resources that they have already employed.

Consequently, in consideration of the all the factors that have been discussed in this report, we can conclude that lending within the private sector will remain low during 2010 because banks will primarily be recovering whereas unemployment and uncertain economic outlook will primarily weaken the demand and supply of loans. It must also be determined whether, as previously mentioned and supported by the article, financial institutions within the European Union have sufficient capital resources in order to counter default risk for the future. However, it is apparent that banks will need to relax their credit policies and inject money through the provision of loans to the private sector households and corporations in order to stimulate demand and supply of goods and services within the economy.

Federal Reserve System exerts significant influence on the money supply and undertakes steps to alter it as and when an economic need for the same arises. To affect money supply, Federal Reserve System has three tools at its disposals. These tools can help a rapidly growing economy stabilize and also facilitate recovery from economic recessions. This paper describes the three tools used by the Fed to influence money supply. It then examines the modifications Fed would make to the three rules when i) an economy is growing with tremendous rapidity and ii) an economy is slumping in recession. The paper concludes by a discussion of changes the Federal Reserve System should make in view of the present condition of the U.S. economy.

Federal Reserve System changes the money supply using three tools, namely open market operations, adjustments in the levels of bank reserve requirements and modifications in the Feds discount rates. Open market operations consist of sale and purchase of outstanding U.S. treasuries by the Federal Reserve System in the in U.S.As open securities market. Purchase of outstanding securities from public directly increases bank reserves and the money supply. Conversely, sale of outstanding securities to households, businesses and governments reduces money supply. Open market operations alter the money supply by at least the amount of the open market transaction. Secondly, Federal Reserve System can increase reserve requirements to reduce money supply and lower reserve requirements to increase money supply. Finally, the Fed can opt for discount rate alterations. Rise in discount rate raises banks required working reserves while a fall in discount rate lowers desired working reserves making more money available for lending and increasing the money supply.
   
An economy that is growing too quickly can become susceptible to high rates of inflation and requires a lowering of money supply. To lower money supply using all the three aforementioned tools, the Fed will sell outstanding securities in the open securities market, increase bank reserve requirement and increase the Feds discount rate. When securities are sold, money, in the form of cash or check, leaves the money supply and is turned over to the Federal Reserve System. Rise in reserve requirements and discount rate will make less loanable money available to banks, which can then decrease the money supply through less lending.
   
During a recession an economy is slumping and the Federal Reserve System will undertake steps to increase the money supply. It will accomplish this through purchase of outstanding securities in the open securities market, decreasing bank reserve requirements and Feds discount rate. When securities are purchased, money, in the form of cash or check, enters the money supply from Federal Reserve System. Decline in reserve requirements and discount rate will make more loanable money available to banks, which can then increase the money supply through lending.
   
Presently, the U.S. economy is recovering from a turbulent recession and Feds reserve requirements and discount rates are at all time lows. These changes were made to enable the economy to cope with recession. With the economy well on its way to recovery, Federal Reserve System should not opt for any further lowering of interest rates and reserve requirements. Conversely, it should begin to chalk out strategies for increasing them in its next meeting. Though the rates should to be increased immediately to avoid short-circuiting the recovery, their future hikes should be on the agenda of the next meeting. Secondly, it must stop purchase of U.S. treasuries and terminate the program wherein risky securities could be traded for safe U.S. treasuries. To sum up, at the next meeting I would start planning for reversals in open market transactions, discount rate and reserve requirements that were prevalent in the society but did not insist on the modifications immediately. This approach will ensure provision of sufficient recovery time to the economy while removing threats of inflation due to all the increased money supply.