Question

MONEY FOR NOTHING questions:

1. What is a boom or a bubble? what is the cause?

2. Many people blame capitalism and free-markets for economic crashes or recessions. are they blaming the correct party? What is the real cause?

3. What is Monetary Policy? Explain the role of money creation and interest rates in "stimulating" the economy.

4. What was the Bretton Woods system? Why did it ultimately fail? what was the end result?

Answer 1

Answer 1:

A period of increased commercial activity within a business, market, industry or economy as a whole id referred to as boom. A bubble is a little different from boom. It is caused by a surge in the market caused by speculation regarding a particular commodity which causes overinflated prices in that particular market segment. It is mainly caused by increase in demand in the market.

Answer 2:

No, it cannot be stated that capitalism and free markets needs to be blamed for economic crashed and recessions in the market. The main cause of a bubble is lacklustre implementation of the laws and absence of strong laws in a particular market.After the recession of 2008, the government has made the laws stringent related to non-financial institutions.

Answer 3:

Changes in the level of money supply in the economy by the Fed to control inflation rates in the economy is referred to as monetary policy. In case of recession, money supply in the economy is increased by purchasing government securities in the open market and this leads to fall in the level of interest rates in the economy which increases the investment level and thus helps in stimulating the economy. On the other hand, when the economy is in expansionary mode, the interest rates are raised by reducing money supply to reduce aggregate demand and thus reduce inflation rate in the economy.

Answer 4:

Under the Bretton Woods System, the countries were pegged to the price of gold, and the U.S. dollar was seen as a reserve currency linked to the price of gold. It failed because of the over valuation of the U.S. dollar and temporary suspension of dollar convertibility. The end result was that in 1973, foreign governments let the currency float which out an end to the Bretton Woods system.