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Essays on Explain Why And How An Unstable Demand For Money Creates Problems For The Central Bank's Objective Essay

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The instability in the central bank currency is one of the ever longest, deepest and most persistent events that ever happened in the in the world economy determining countries like the united states of American History (Bade & Michael, 2009, pp. 23-45). Financial instability is believed to have lasted from 1929 to 1939 whose effects were severely bad. Financial instability is believed to have started in the United States soon after the New York stock market was hit by financial crisis in the year 1929.According studies by late 1932, the value of the stock had dropped drastically to about 20% as compared to the previous value with 25,000 banks going bankrupt (Bernanke, 2000, pp. 45-67).

These conditions were worsened by the mistakes in the implementation of the monetary policy as well as adherence to the gold standard. This greatly affected the levels of demand and productions which turn resulted to increased levels of unemployment by almost 30%. The financial instability had other effects on other world economies. Germany and Britain were greatly affected by the financial instability so they sought protection through imposing heavy tariffs and quotas on their goods and services which in turn reduced the ultimate value of the international trade by more than half in 1932 (Mankiw, 2008,pp. 34-60). When this is compared to the 2000, recession it is similar in their effects given that the global market was hit by financial crisis leading to collapse of major investment banks in the United States such as Lehman’s Brother Bank, Bear Stearns an d Merrill Lynch (Rangarajan & Dholakia, 2009,pp. 56). The 2000 recession is considered to be similar to the world’s financial instability given the fact that both were caused by the shortages of liquidity in the banking systems which resulted to down fall of major financial institutions as well as government bail outs (Mervyn, 2001,pp. 67-70).

Moreover, the 2000 recession and the great depression of the United States of America were both caused by fall of stock market prices around the world leading to the collapse of major banks as well as financial institutions. In both events the Gross Domestic Product or real per capita income was greatly affected. Gross Domestic Product is a term which describes the total summation of all goods and services produced in a particular economy, weighted by market prices and adjusted for inflation.

Since both the events affected the level of economic activities, the real Gross Domestic Product fell by almost 25%, erasing all the perceived economic growth of the previous years. In addition, the events caused a significant fall of prices in the production sector making the industrial productions to drop by almost 7% in both cases (Rosenof, 2008, pp. 77). Among other roles played by the central bank, the central bank is supposed to make sure that the price in any particular state is stable regardless of any underlying factors.

But excessive borrowing has led to unstable financial environments which make it hard for the central bank to seriously pursue any financial stability in weak financial states (Rosenof, 2008, pp. 77). In addition to this, unstable borrowing from the central bank has led to the increase in opportunities of cost borrowing by the central bank itself. This tends occasionally to reduce the plans of liquidity demand. Most banks in most states do rely on the central bank to facilitate in the states financial liquidity.

Therefore this affects the future refinancing efforts of the other financial players in the country. Although there are similarities between the 2000 recession and the Great Depression explicit differences exists between the two events. The differences are exhibited on the impact they have on stock markets and individual economies (Keynes, 2009,pp. 45-60). . Many citizens from many countries, both poor and rich were severely affected. There was a witnessed rise in unemployment rates in these countries. Cities which depended heavily on construction industry were virtually affected since its operations were completely paralyzed due to lack of sufficient funds.

This emerged from heavy policies which were implemented by the financial institutions regarding borrowing and the high interest rates that were being charged by the financial institutions were very high. Farming was also affected especially in the rural areas since all the crop prices dropped by almost 60%, this contributed to the failure of economic areas which strongly depended on primary sector industries such as cash cropping, mining and logging. When compared to the side effects of the current 2000 recession there are great differences in their impact though in both events the economic activities were highly affected by the events (Keynes, 2009,pp. 45-60).

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