Economics Uncertainty and Monetary Policy

Question: Discuss about the Economics Uncertainty and Monetary Policy. Answer: Introduction The present assignment covers the explanation on economic equilibrium stability hat requires the business operation at level of output at which all the demand and supply curve intersects. The concept of economic equilibrium stability has been presented by considering the business cycle as well as market equilibrium. Equilibrium is said to be a level where demand and supply of products and services are balanced at a common point (Benavente, 2016). The assignment covers the concept of Competitive equilibrium as well as Nash equilibrium based on the optimum output level at an intersecting point of demand and supply. Economic equilibrium is a point or a level where the forces of economy are balanced at one common point that remains constant even when there is absence of external influences. It is essential for the economy to operate its output at which the aggregate level of demand curve and supply curve at long- run as well as at short- run intersects. In order to measure the equilibrium point, two- way relationship of the business product exists in terms of price and output level (Lehmann, Ledezma Van der Linden, 2016). As the level of product price changes, it changes the level of real Gross Domestic Product (GDP) with respect to the market industry of the product whereas change in real GDP changes the level of price. When the change in GDP occurs due to change in level of price then the situation is defined by using aggregate demand curve while change in real GDP is explained by aggregate supply curve. The above diagram presents the short- run equilibrium of the economy using the aggregate demand and supply curve. Point E denotes the level at which the price (OP) and output quantity (OQ) intersects to present the optimum and balanced level of output (Vannoorenberghe Janeba, 2016). However, in case the level of price for the output changes, the aggregate supply curve and aggregate demand curve automatically changes and the situation occurs in the long- run. Change in price results in shifting of aggregate demand curve along with the aggregate supply curve that is affected by domestic and international customer requirements. In case the price of output increases, the aggregate demand and supply curve shifts to right. On the other hand, the aggregate supply is fixed in the long- run considering the production factors and other external factors that affects the economy (Knittel Pindyck, 2016). The above diagram explains the shifting of aggregate demand curve as well as aggregate supply curve along with the long- run aggregate supply curve. It has been observed that the aggregate long- run supply curve remains fixed while the short- run aggregate supply curve 1 shifts to the right at a point B indicting increase in price with the increase in output. Similarly, shifting of aggregate demand curve from point 1 to point 2 indicates decrease in output level in the long- run (Crucini Davis, 2016). Accordingly, the point of equilibrium occurs where demand curve and supply curve aggregate during short- run and long- run intersects at the same point. Considering competitive equilibrium, supply curve and demand curve in the economy occurs at a same point considering the price of product supply is equivalent to the output demand. For the purpose of stable economic equilibrium, it is essential for the industry to consider balanced supply and demand at a given price level. It is important because if the level of supply and demand in unequal, the monopoly market condition would occur in which the seller would influence the price because in this market, number of seller is one while number of buyers is large (Cachanosky Salter, 2016). For the purpose of stable economic equilibrium,static equilibrium considers change in demand and supply of the output level. Accordingly, in order to form stable equilibrium it is important to operate the output level where the demand and supply curve intersects which changes if the price of the output changes. The stable economic equilibrium considers business cycles, monetary policy, and fiscal policy represents combination of tax and economic activities that increase the industrial growth along with the increase in rate of inflation. In case there is economic recession, tax deduction as well increase of government expenses affects the activities of economy. In view of the monetary policy, indicators of the economy like GDP or rate of inflation deals with the trailing indicators in the economy (McKay Reis, 2016). Accordingly, monetary policy indicates the equilibrium concept by using a Gross Domestic Product equation which considers the factors of investment amount, consumption, government expenses and net income from international transaction. Economic equilibrium can be achieved by maintaining growth in real GDP at a positive point i.e. at increasing price and demand level. Besides, it is essential for the economy to minimize the rate of inflation as well as lower the interest rates to improve the investment opportunities and international trading opportunities. In addition, the productive capacity must be utilized at an optimum level at given level of stock that assist the economy to achieve stable equilibrium following the demand curve and supply curve (Bekaert, Hoerova Duca, 2013). Conclusion Considering the explanation and discussion on the stable economic equilibrium it can be concluded that there should be balanced level between demand and supply of the output. In the short- run equilibrium is the point where demand and supply becomes equal at a given price level considering the present inflation rate. To maintain the economy and growth, it is important to maintain the equilibrium at operate the business output at a balanced level where aggregate demand curve and supply curve intersects. The study also covers the understanding of equilibrium by considering monetary and fiscal policies under business cycle of economy stating the maintenance of GDP and inflation rate. Reference List Bekaert, G., Hoerova, M., Duca, M. L. (2013).Risk, uncertainty and monetary policy.Journal of Monetary Economics,60(7), 771-788. Benavente, J. M. G. (2016). Impact of a carbon tax on the Chilean economy: A computable general equilibrium analysis.Energy Economics,57, 106-127. 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