QUESTION 3
Economic theories explain, interprets, and solve the behavior of the economic phenomena using the positive and normative approach to provide the best solution to a certain economic situation. For instance, Keynesian theory subdued stimulate the economy through government money. Other examples of economic theories include classical economic theory, New Classical theory, and New Keynesian theory.
An economic variable is any mensuration that aids in determining how an economy functions. Examples include exchange rates, price levels, interest rates, and available resources. They have a direct impact on future trade and investment decisions for years to come. The exchange rate reflects how a country monitors and regulates its currency in the foreign exchange market. The interest rate and price levels are inversely related whereby, when interest rates are low, the economy grows, and inflation increases. Also, when interest rates are high, the economy slows and inflation decreases.
Economic hypotheses are Value, value and price, wealth, stocks and flows, and optimization. Value or utility is where goods and services satisfy human consumption and they are scarce and transferable. In value and price, the value is constant while the price can generally rise or fall. Wealth refers to any commodity that possesses all the features of the value, forms of wealth are individual wealth, social wealth, national or real wealth, international wealth, and financial wealth. A stock variable does not depend on time like national income while a flow variable has a specific period of time like national wealth. In optimization, the consumer chooses the best combination of goods that maximizes his or her utility at a given fixed income. Also, the firm aims at minimizing the cost and maximizing profit.
These economic theories are applicable in the real world in that they help in predicting the price for a commodity, for instance, the impact of a price increase to the consumption of a given product. Also, they provide new evidence to solve a long-period disagreement among economists. Finally, they help to understand complicated relationships between economic growth and the primal economic condition of a particular country.
Foreign Exchange Intervention requires the efforts of the central bank to stabilize a currency both in the market and non-market forces. The stabilization of the currency requires short-term or long-term interventions in the foreign exchange market for the investors to be more comfortable with the transactions using a given currency.
The intervention of the Central banks in the foreign exchange market helps it to manage the volatility and the level of the exchange rate. For instance, an increase in the volatility of the exchange rate increases the risk of holding domestic assets making its prices to be more volatile. The Central banks are motivated to intervene in the foreign exchange market due to a desire to maintain the desired foreign exchange rate, leaning against the wind, reducing exchange rate misalignment, and ensuring liquidity. These motives will enable the central bank to often buy foreign currency and sell local currency if the local currency appreciates it. Leaning against the wind limits the exchange rate volatility leading toe an effective exchange rate. Central banks ensure adequate liquidity to regulate disorderly markets and curbing financial stress.
The application of economic principles and concepts helps to solve the practical problems of a business. For instance, they help to present a clear picture of the theoretical principle and the behavior of business for easy study. They reconcile the perspective statistics of economists and the accountants on how costs and profits are efficiently utilized for better decision making and correct forecasting of a business firm. They help in coordinating economic quantities such as savings. Finally, they help in adjusting the business operations into various macro-economic elements like government economic policies, and business cycles.
In conclusion, the economic theories and approaches are most useful and applicable to the real word business firm. They provide better solutions to micro and macro-economic problems that hinder the success of the business firm. In addition to regulating the economic variables and hypothesis, the Central Bank intervenes in the foreign exchange market to stabilize the currency. Finally, micro and macro-elements are necessary for the decision-making process to provide solutions to several problems of the business firm.