Read the following article on the \"Economic Triumvirate\": Downloadable pdf ver
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Question
Read the following article on the "Economic Triumvirate": Downloadable pdf version: The Global Elite: Economic Triumvirate, or go to http://www.newsweek.com/id/176288Explain why these three men (the 3 bankers who are listed as the 4th, 5th, and 6th most powerful people in the world) might be considered more powerful than most countries' leaders.
Explain how or why, during the recession of 2008–09, banks of the world seemed to unite on cue to lower interest rates worldwide.
Provide a short, 2-paragraph policy on how you would improve U.S. monetary policy.
Explanation / Answer
First, it is important to realize that the three men identified in the Newsweek article are not just any bankers, but rather they are central bankers. In fact, they are central bankers in three of the most important central banks in the world: U.S., EU, and Japan. According to the CIA World Factbook, the overall size of these three economies, as best measured by Gross Domestic product, $14.26, 14.51, and 4.14 trillion respectively (CIA, 2010). They are all within the four largest economies in the world (China is 3rd). Central banks around the world are given a number of powers. One primary power that each of these three central banks have is the ability to engage in monetary policy. Monetary policy is the control of the supply of money (Mankiw, 2009). Monetary policy affects the lives of all of the citizens within an economy. An expansion of the money supply increases the supply of loanable funds/credit. Thus, in short, there is more money available for loans. Consumers can spend more money (using credit), business can acquire loans to finance investments, families can purchase cars and houses (or bigger cars and houses). Thus, economic activity expands. Similarly, interest rates decrease as the supply of loanable funds increases. The lowered interest rates allows for consumer and firm spending to be done at a lower expense. Furthermore, the maintenance of debt, both at the national and local level, is reduced. Thus, less tax revenue is devoted to interest on debts. Similarly, lower interest rates make current deficit spending less costly and, hence, allows for more public expenditures (without associated taxation) to improve the quality of life of the citizens of this country. Of course, the expansion of the money supply has its drawbacks. As the interest rates are driven down so too is the return to savings. This destroys the incentive to save and encourages additional consumption, at the sake of an individual’s future well-being. At the macroeconomic level the lack of individual savings often requires foreign investment to finance growth in the economy. Thus, a countries economic dependency on foreign investors can be enhanced. Another significant impact of an expanded money supply is inflation. As shown simply in the Quantity Theory of Money, an expansion in the supply of money is expected to lead to inflation (Mankiw, 2009). Inflation has a number of serious effects. Primary among these effects is its destructive impact on wealth. As the price level increases the real value of wealth (savings, house, etc.) deteriorates. Thus, inflation acts as a tax on wealth (Mankiw, 2009). Other than the impacts of monetary policy of citizens of the country monetary policy changes can spillover onto those in other countries. A primary mechanism for this transmission is exchange rates. The theory, known as the Purchasing Power Parity, argues that exchange rates should be equal to the relative price of goods in the two countries (Mankiw, 2009). Thus, an expansion in the money supply depreciates the country’s currency. This makes foreign made goods more expensive for domestic consumers and domestically-made goods less expensive for foreign consumers. Also, as discussed in the Newsweek article, central banks help facilitate this international trade by providing currency for foreign banks and foreign firms to do business using a country’s currency. Exchange rates, both their level and stability, not only affect the cost of internationally produced goods, but also affect other economic decisions such as firm location . The previous arguments just outline some of the many impacts monetary policy has on the well-being of the world’s population. As leaders of the three major economies their decisions are of particular importance. Other responsibilities of these central banks, such as their regulatory functions and the payment system, also affect the quality of life of many. Thus, it can be argued that their importance rivals the importance of presidents of many countries/leaders. Their influence over these economies is substantial, as previously outlined, The economy of a country is one of the most important factors in the quality of an individual’s life. Thus, the policymakers who influence the three major economies of the world are significance.
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