Global Economic Stability

Global economic stability

Compiled By: bhaglal

gaurav Sumit Singh

CONTENTS         

Introduction Why it is Important Factors impacting Global Economic Stability Business Cycle Financial Crisis Stability and Growth Pact Fiscal Policy Monetary Policy Automatic Stabilizer

INTRODUCTION 

Economic stability refers to an absence of excessive fluctuations in the macroeconomy. macroeconomy An economy with fairly constant output growth and low and stable inflation would be considered economically stable

 Unstable Economy: An economy with frequent large recessions, a pronounced business cycle, very high or variable inflation, or frequent financial crises would be considered economically unstable

WHY IT IS IMPORTANT  Avoiding Economic & Financial Crisis

 Avoiding large swings in economic activity, high inflation, and excessive volatility in exchange rates and financial markets  Dynamic market economy

 Countries are becoming ever more interconnected

Factors impacting global economic stability  Business cycle  Financial Crisis  Stability and Growth Pact  Fiscal Policy  Monetary Policy  Automatic Stabilizer

BUSINESS/economic CYCLE  Economy-wide fluctuations in production or economic activity over several months or years  Fluctuations are often measured using the growth rate of real gross domestic product  Unemployment high – Monetary & Fiscal Policy smoothing role  Mitigation - Govt. should increase the demand

Cont…  External (exogenous) versus internal (endogenous) causes of the economic cycle  Credit/ debt cycle  Real business cycle theory  Politically based business cycle

Financial crisis Financial crisis includes:     

Stock market crashes Financial bubbles Currency crisis Banking panics Many recessions coincided with these panics

Types of Financial crisis  Banking crisis  Speculative bubbles and crashes  International financial crisis  Wider economic crisis

Stability and Growth Pact  The Stability and Growth Pact (SGP) is an agreement by European Union member states related to their conduct of fiscal policy, to facilitate and maintain Economic and Monetary Union of the European Union  The pact was adopted so that fiscal discipline would be maintained and enforced in the EMU

FISCAL POLICY  Fiscal policy was invented by John Maynard Keynes in the 1930s.  Fiscal policy is the use of government spending and revenue collection to influence the economy.  The two main instruments of fiscal policy are government spending and taxation.  The three possible stances of fiscal policy are: 1. Neutral Stance- Where G = T.

 2. Expansionary Fiscal Policy Where G > T.  3. Contractionary Fiscal policy Where G < T.

MONETARY POLICY Monetary policy is the process by which the government, central bank, or monetary authority of a country controls:II. the supply of money III. availability of money IV.cost of money or rate of interest in order to attain a set of objectives oriented towards the growth and stability of the economy

AUTOMATIC STABILIZER  Automatic Stabilizer work as a tool to dampen fluctuations in real GDP without any explicit policy action by the government. It is a government program that changes automatically depending on GDP and a person’s income.  For example: Induced Taxes – Like Income Tax and Corporation Tax.  In an economic boom tax revenue is higher and in a recession tax revenue lower.

 Transfer Payments – Like unemployment and welfare benefits.  Government expenditure increases automatically in recessions and decreases automatically in a boom.

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OPEN FOR DISCUSSION

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