Economics of Financial Markets

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ASSIGNMENT <University> Economics of Financial Markets By <Your Name> <Date> <Lecturer’s Name and Course Number>  <Your Name> 2023 Page 1 of 13

ASSIGNMENT 1. Aggregate Demand Aggregate demand demonstrates market demand for all goods and services. It matters in macroeconomics. Algeria's economy is complex, therefore you need to look at it broadly. Focusing on aggregate demand can help. Algerian officials have long worried about inflation. The first graph shows recent inflation changes. The New Keynesian model can assist us comprehend Algeria's inflation. This inflation theory is based on aggregate demand, which includes consumer, business, and government expenditure. Algeria's economy relies heavily on oil and gas, making it vulnerable to inflation. Oil prices, the government's principal revenue source, affect consumer spending (Wassila and Salah, 2020). Oil prices affect Algeria's budget deficit, government spending, and economy. Because of this, prices and living costs may rise. The New Keynesian paradigm believes collective demand drives inflation the most. Demand-pull inflation occurs when consumers spend more than businesses can produce. Negative forces may arise if demand drops. Algerian economic policymakers are struggling to balance price stability and economic growth. Furthermore, in the case of Algeria, a number of factors, such as government spending, private investment, and global economic conditions, are linked to aggregate demand. With its emphasis on demand-side management via fiscal and monetary policy, the New Keynesian model provides a theoretical framework for comprehending these problems (Lyes, 2023). In order to combat inflation and other economic challenges, Algeria's government may wish to consider diversifying the economy, managing oil earnings responsibly, and enacting fiscal and monetary policies consistent with the country's economic goals.  <Your Name> 2023 Page 2 of 13

ASSIGNMENT Diagram 1: Inflation in Algeria National GDP is an important economic statistic since it shows how well the economy is doing. Diagram 2 shows Algeria's GDP increase throughout time. The New Keynesian model can explain this mismatch by emphasizing government expenditure and investment and outside forces. The New Keynesian model emphasizes government spending as a major GDP contributor. Algeria relies on hydrocarbon profits, especially oil and gas exports. Domestic oil production and global oil prices affect government revenue. Algeria's economy benefits from high oil prices because the government can spend and invest more. When oil prices are low, the government cannot spend as freely, slowing economic growth. Algeria must diversify its economy and lessen its oil dependence to sustain GDP growth. To grow the economy, the government should adopt sound budgetary policies and invest in non-oil sectors. Algeria can boost GDP and economic stability by solving these challenges. Diagram 2: GDP Growth in Algeria  <Your Name> 2023 Page 3 of 13

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ASSIGNMENT 2. Labor Market Algeria's labor market reflects its economy. A fast rising population and high unemployment rates are only two of Algeria's labor market issues. Diagram 3 of the unemployment rate shows Algeria's complex labor market. The New Keynesian model simplifies labor market fluctuations and their effects on the economy. Algeria's competitive labor market contributes to significant unemployment. Restrictive rules or those protecting businesses may rigidify the labor market. Algeria, like many others, has a limited labor market. These restrictions may make it harder to match job seekers with suitable jobs, raising unemployment (Lahmar, 2019). The Algerian labor market is tight due to a lack of qualified workers, severe labor restrictions, and a supply-demand imbalance. Algeria's labor market must be addressed for economic stability and development. Unemployment can be reduced if the government opens the labor market and creates jobs. Investing in education and vocational training can also reduce the skills gap and match worker  <Your Name> 2023 Page 4 of 13

ASSIGNMENT supply and demand. Algeria can improve its labor market, reduce unemployment, and boost economic growth by addressing these issues. Government policy, aggregate demand, and the labor market are interconnected under the New Keynesian model. Addressing Algeria's labor market issues can boost economic stability and government efficiency. If the labor market is healthy, the government will spend less on unemployment benefits, people will have more disposable income as well as economic resilience (Djorfi, Mekhnane and Bounehas, 2022). Diagram 3: Unemployment rate in Algeria Diagram 4: Philips curve  <Your Name> 2023 Page 5 of 13

ASSIGNMENT Understanding Algeria's Phillips Curve requires inflation and unemployment data. These figures can be graphed to test the Phillips Curve's inflation-unemployment trade-off. Changes in economic policy, the labor market, and global economic trends can impact the Phillips Curve relationship's long-term stability. Thus, any full analysis must consider these elements and their impact on Algeria's Phillips Curve dynamics. 3. Policy Algeria, like many other countries, adopts a number of economic techniques to address its difficulties. Unemployment, inflation, and the overall status of the economy are just a few of the variables that these policies affect. Diagram 4 depicts the relationship between fiscal policy—in this case, government spending—and Algerian GDP. The New Keynesian model highlights the interaction of monetary and fiscal policies. The term "fiscal policy" refers to how governments influence the economy through the imposition of taxes and the expenditure of public funds. Algeria's economy is heavily influenced by government spending, which is a critical component of the country's economic policy. Changes in government spending, according to Diagram 4, can have an effect on GDP. This link  <Your Name> 2023 Page 6 of 13

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ASSIGNMENT emphasizes the significance of government fiscal policy in tackling economic difficulties. Algeria's economic difficulties have been addressed through fiscal policy. When the Algerian economy is weak or in a slump, the government may increase spending. Government investments in areas such as infrastructure, healthcare, and education, among others, have the potential to increase both consumer demand and employment (Bounoua and Achour Tani, 2023). These fiscal initiatives are intended to mitigate the effects of the recession and hasten the economy's recovery. When the economy is booming or inflation is a concern, governments may decide to cut spending. Such spending cuts may reduce inflation and cool an overheating economy. The New Keynesian paradigm prioritizes economic stability and the resolution of difficulties such as inflation. Controlling inflation has been a major concern for Algeria, and the country's economic policy has been altered as a result. Fiscal and governmental spending are closely linked to the other components of the New Keynesian framework. Government expenditure changes can have an impact on aggregate demand because they stimulate consumer and economic activity. As a result, GDP, unemployment, and inflation could all suffer (Abid, Benmeriem, Gheraia et al., 2023). To properly handle Algeria's economic challenges, policymakers must have a strong understanding of the intricate web formed by fiscal policy and the larger economy. Diagram 5: Fiscal policy impact in Algeria  <Your Name> 2023 Page 7 of 13

ASSIGNMENT Diagram 5 examines interest rates while focusing particularly on the issues of inflation and monetary policy. According to the New Keynesian model, the central bank's decisions can have an impact on inflation rates. Algeria's central bank must carefully adjust interest rates to control inflation. Algeria needs a comprehensive plan including successful monetary and fiscal policies to address high unemployment, inflation, and weak economic growth. The government must prioritize diversifying the economy's income sources and reducing its oil dependence. Diagram 6: Monetary policy impact on inflation  <Your Name> 2023 Page 8 of 13

ASSIGNMENT Diagram 7: Algeria bank rate A country's central bank lends commercial banks money at the bank rate, sometimes called the policy rate or key interest rate. Central banks use it to set interest rates and monetary policy. Algeria's central bank, Bank of Algeria, sets rates. Bank of Algeria rates depend on the central bank's economic assessment and monetary policy goals. Bank rate modifications reduce inflation, enhance growth, and stabilize finances. The Algerian bank rate fluctuates with  <Your Name> 2023 Page 9 of 13

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ASSIGNMENT inflation, economic growth, exchange rates, and more. For current bank rates, visit the Bank of Algeria's website or phone the central bank. They normally disclose their policy rate and monetary policy to the public and financial institutions. Economic stability and loan and savings interest rates depend on the bank rate. It's crucial to central bank inflation management and commercial bank behavior. Algeria uses the bank rate for monetary policy. Diagram 8: Algeria’s Okun’s law Unemployment is linked to GDP below potential GDP by Okun's Law. It was invented by American economist Arthur Okun. Okun's Law states that unemployment grows when GDP falls short of potential GDP. According to Okun's Law, 1% unemployment reduces the GDP gap by 2%. The Algerian economy would follow Okun's Law. GDP below potential increases unemployment, suggesting economic underperformance. Economic overperformance lowers unemployment when GDP exceeds potential GDP. GDP-unemployment relationships vary by  <Your Name> 2023 Page 10 of 13

ASSIGNMENT country and time. Labor force participation and labor market structure may affect unemployment rates. Conclusion To sum up, the New Keynesian model is an important way to look at Algeria's current economic state. Diagrams are often used to explain ideas like inflation, GDP, the job market, and policy, which shows that the model can be used in the real world. For Algeria's economic problems to be solved successfully, it needs to make policies that cover all the important issues.  <Your Name> 2023 Page 11 of 13

ASSIGNMENT References Abid, M., Benmeriem, M., Gheraia, Z., Sekrafi, H., Abdelli, H. and Meddah, A., 2023. Asymmetric effects of economy on unemployment in Algeria: Evidence from a nonlinear ARDL approach. Cogent Economics & Finance , 11 (1), p.2192454. Bounoua, A.W. and Achour Tani, Y., 2023. The Impact of Monetary Shocks on Economic Growth in Algeria: An SVAR Analysis (1990-2020). les cahiers du mecas , 19 (1), pp.1-16. Djorfi, Z., Mekhnane, O. and Bounehas, A., 2022. The Impact of Economic Recovery Programs on Indicators of Economic Welfare in Algeria-An econometric study using the ARDL model for the period 2000-2020. Dirassat Journal Economic Issue , 13 (2), pp.127-141. Lahmar, K., 2019. Unemployment in Algeria. International Journal of Rural Development, Environment and Health Research (IJREH) , 3 (1). Lyes, B., 2023. Does the fiscal policy have an impact on economic growth through the fiscal multiplier in Algeria. ةيداصتقا تاسارد , 17 ) 1 ), pp.01-14. Wassila, D. and Salah, R.L.M., 2020. Analysis of employment policy under economic recovery programs Case study of Algeria. Journal of Economic Sciences, Management & Commercial Sciences (JESMCS) , 13 (2).  <Your Name> 2023 Page 12 of 13

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ASSIGNMENT  <Your Name> 2023 Page 13 of 13

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