General quistions Essay Example | Topics and Well Written Essays - 250 words

General quistions - Essay Example he setback of housing boom experienced together with the weakness in the global financial products are some of the reason advanced for the crisis (Mishkin ,chp 4,pp 69, 2010). Both minksy’s and minshik’s theory have developed under sound economic theory thus having strong support from the theory, but if considered what would result if the interest rate were zero. This is one of the weaknesses in both analyses; second with the two theories do not consider the money illusion concept thus assuming that individual is not rational. Third, the debt, deficit management framework is not well designed so as to consider effect of interest rates. This assumption is weak and unrealistic (Mishkin ,chp 3,pp 52, 2010). The modern monetary theory was originally propagated by Knapp; this theory delineates consequences of using fiat money in an economy. Fiat money is currency created by the government. According to this theory, for money to be in circulation the government needs to spend, also in order to foster acceptance and private confidence of the currency issued by the government, the government imposes a tax obligation that corresponds to the government spending. In this case, the government will be able to macroeconomic parameters such as unemployment and inflation (Mishkin ,chp11,pp 369, 2010). Taylor approach to inflation targeting: this refers to monetary policy that many central banks follows, this policy stipulates how the central bank would stipulate the nominal interest rates so to diverge the target inflation rates and the real GDP to the potential GDP. This rule takes into consideration the deviations that happened to the equilibrium level of unemployment and the inflation rate that is health for the economy (Mishkin ,chp12,pp 408, 2010). When there is underemployment this is advantages to employers since they are able obtain cheap labor as compared to a scenario of full employment therefore underemployment leads to reduction of cost of production.