FREE ESSAY ON RIPPLE EFFECTS BY ECONOMIC FACTS

RIPPLE EFFECTS BY ECONOMIC FACTS

There are several things that can cause a ripple effect in our economy. There are economic
facts, or things that will happen no matter what, that start to affect more and more
people, until they sooner or later effect everybody. The Keynesian Transmission Mechanism
is a good example of something that has a ripple effect on everybody. The Keynesian
mechanism has three stages, each of which has an effect on something. The first stage is
the increase or decrease in the supply of money (A-1). The second stage is for the
investment to rise or fall in conjunction with the change of the money supply (B-1). The
third and final stage in the mechanism, is for the total expenditure/aggregate demand
curve to shift accordingly to the both the money supply, and the investment. There are
also some walls that block the mechanism from working, that have ripple effects on the
economy. These include the Liquidity trap, and Interest-Insensitive Investment.
In the first stage of the Keynesian Transmission Mechanism, the money supply is either
raised, or lowered by the Fed. They do this by buying and selling bonds to the public. If
they buy bonds back, then they are essentially lowering the money supply, where as if
they sell them, then they are raising the money supply. Looking at this alone, one can
predict a rise or a fall in the amount of each individual has due to the scarcity of
money, or the lack there of. This will have a ripple effect on the economy, because
people will save more if they have less, and spend more if they have more (C-1). For
example, if the Fed were to increase the money supply would cause a surplus of money in
the money market. This in turn will have an effect on the interest rates. The interest
rates will lower due to the money surplus (B-1). Because of the lower interest rate, the
AD curve will shift to the right. This happens due to a drop in the price level because
of the lower interest rate. With the lower interest rate, the price of houses and cars
will go down. This in turn raises total expenditures, and Real GDP. If Real GDP raises,
then the unemployment goes down, do to the inverse relationship between GDP and
Unemployment. Basically this all means that when the money supply increases, there will
be more money in ones pockets. With more money in ones pocket, they will be more likely
to look into and possibly buy a new car or house. The resurgence of buying power by the
public will cause Real GDP to shift to the right. There are also more people working to
get the money. The opposite is also true (D-1.2.3). If the Fed were to decide to buy back
some bonds, then the money supply would be lowered, causing an increase in the interest
rate, which in turn will shift the AD curve to the left. And because of the leftward
shift in the AD curve, the inverse relationship states that unemployment will be higher.
Meaning that there will be fewer jobs, and more people searching for them.
There are two traps in the Keynesian Transmission Mechanism. The first is called the
Liquidity Trap. This occurs when the Demand for money is at a horizontal position (E-1).
This means that it would not matter if the money supply were to be increased from S1 to
S2, the demand would stay the same. Because of this, there would be no change in the
interest rate, so investment and Real GDP would not be affected. Basically there would be
more money out there, but it wouldn't be as needed. The second trap is the
Interest-Insensitive Investment. This means that the investment would not change due to a
change in the interest rate. If the interest rate doesn't affect the investment, then the
investment would not be able to cause a shift of either left or right of the AD curve.
This usually happens if a firm or a corporation is expecting an increase in the interest
rate, even though it is low at the time. The corporation will not be as likely to invest
knowing that they will get burned later on. Since in either way, you have an increase in
the money supply, there will be a result that affects everybody. If the money supply is
increased, and the AD curve doesn't shift to the right, then there will be more money to
pay to the same amount of employees. The opposite is true, if the money supply is
decreased, then there will be less money to go around for the same amount of jobs. 
The Keynesian Transmission Mechanism is an economic tool used to show the ripple effects
on economy due to the change in the money supply. The three stages of the mechanism all
have there own effects on everybody, along with there effects on each other. Be it
increasing the job market, or making it easier to buy a house, the mechanism has its
effects on everybody. Even when the Keynesian Transmission Mechanism gets blocked, there
are still ripple affects the effect people. There could be an increase in the money
supply, which would cause people to spend more, even though the interest rate stays the
same. Unemployment can even be changed due to the raise or drop in money supply.