LR growth, Economic Fluctuations, US Stabilization Policy Term Paper

LR growth, Economic Fluctuations, US Stabilization Policy - Term Paper Example In addition, inadequate financial institutions, political instability, high level of risk, and dictatorship in governance like showcased by Zimbabwe inhibit economic development. The above discussed factors inhibit capital inflows into the developing countries. This offers an explanation why the developing world will never economically develop as compared to the developed economies. Lastly, the policies of these countries discourage domestic saving, thus lowering the rate of capital accumulation. The reduced domestic savings leads to low level of investment. thus reduced level of capital stock in the countries. An increase in the level of savings increases the total output in the short-run, but in the long run it increases the ratio of capital to labor thus leading to decrease in returns on capital. This in turn results to capital outflow instead of inflow. Economic Fluctuations The phrase business cycles refer to economic cycles or fluctuations that are experienced by economic activ ity of a certain state. There two main theories that have been propagated to explain how business cycles work; New Keynesian and the real business cycle theory, these two theories differ a lot as discussed below. New Keynesian models New Keynesian models view, business cycles as reflection of a possibility of the economy being in equilibrium in the short run where such points of equilibrium are above or below the full employment level. Therefore, when the economy is operating below the full employment level, then unemployment arises. New Keynesian economist believes business cycles results from fluctuations of effective demand. Effective demand can be classified as consumption demand and investment demand that is amount resources demand for consumption and for... The researcher states that from the discussion, that was presented in this term paper, it cannot be disputed that the differences in levels of capital stock between the developed countries like USA and the Western Europe and developing countries in the sub-Saharan Africa leads to differences in economic development. In this paper, the researcher aims to consider countries like Zimbabwe, Rwanda, Kenya and Somali to compare the level of economic development in these countries to that of USA and Western Europe. The actions of these countries’ national governments determine level of capital inflows that these countries experience. In these sub –Saharan countries, they often experience political unrest that happened in Kenya in the year 2007/2008. These areas are also war prone, such as the 1994 Rwanda genocide and the civil war currently in Somali. In addition, inadequate financial institutions, political instability, high level of risk, and dictatorship in governance inhib it economic development. The factors, that were discussed in this term paper inhibit capital inflows into the developing countries. This offers an explanation why the developing world will never economically develop as compared to the developed economies. Although, opponents of the measures presented in this paper, argue that the amount of money in circulation will increase thus eroding the value of the domestic currency. It is concluded that such measures will trigger investments that will offset effects of increase in money supply.