Macroeconomics: Banking, Policy and Economic Systems

Banking System Functions and Monetary Policy

Functions of the Banking System: The banking system performs several critical roles, including the uptake of funds, provision of loans, financial counseling, securities custody, debit receipts, and transfers.

Monetary Policy: This refers to the set of actions taken by the monetary authority to control the money supply, its price, and interest rates to achieve specific macroeconomic objectives.

• Expansive Policy: This approach increases aggregate demand, lowers interest rates, and increases the money supply.

Causes of Unemployment and Economic Schools

Causes of Unemployment: Unemployment can be attributed to an insufficiency of demand, wage rigidity, improvements in competition levels, technological advances, the incorporation of women into the workplace, and immigration.

Economic Schools of Thought

• Classical School: This school posits that unemployment is caused by inadequate aggregate demand; however, they believe the downward flexibility of wages allows the market to find its own balance.
• Keynesian School: Keynesians argue that unemployment stems from inadequate aggregate demand and that the state must intervene to increase public spending, as prices and wages are not flexible downwards.

Solving Environmental Problems

Solutions: Addressing environmental issues requires clean renewable energy, environmental education, regulation, and the implementation of taxes and subsidies.

Causes: Environmental degradation is driven by the excessive and uncontrolled consumption of natural resources and population increases. These factors have often been ignored by economic systems as they are not considered externalities.

Comparative Analysis of Economic Systems

Central Planning

The ultimate aim of Central Planning is the collective good. In this system, there is no freedom of action for operators, and the state sets all prices and wages.

Market Economy System

The Market Economy is characterized by the private ownership of productive factors, freedom of choice, and a lack of state interference in economic activity. Producers have the freedom to enter and exit the market, and wages are determined by market forces.

Mixed Economic System

A Mixed Economic System features private means of production and freedom for economic agents. It involves both a private and a public sector, though most prices are determined by the state.

Fiscal Policy and General State Budgets

General State Budgets (PGE): These are prepared by the government and approved by the Cortes Generales. They consist of a set of documents recording the estimated revenue and expenditure for a given year.

Fiscal Policy: This involves the set of decisions taken by the government regarding tax levels and public spending to influence aggregate demand.

Money Demand and the Effects of Inflation

Causes of Money Demand

• Transaction motives
• Precautionary motives
• Speculative motives

Effects of Inflation

Inflation leads to a loss of purchasing power, increased uncertainty, and a loss of competitiveness for domestic production. It also contributes to unemployment and various tax distortions.