Capital Injection and the Consumer

Money cash
Money cash (Photo credit: @Doug88888)

Capital Injection is pumping money into the economic system by the government as a part of its fiscal policy. We generally hear the term, “Injection” whenever crisis wallops our economies. Just as, when we are broke, we take help from others to fill in our necessities, capital injection is the way the governments fill in the necessities of cash strapped institutions; institutions which are so cash-less that they begin to affect the economy with their imperfections.

 Capital Injection is a tool to curtail the slipping down tendencies of economic growth.

The capital crunch arises when the already produced goods rot in the circle of production. That is they’re stuck between consumption and production and this devastates the value of the product by depreciating its content through time. When the goods are losing value due to depreciation, the already fixed price of that commodity seems more and more meaningless, and the already downward curve dives starker triggering an unprecedented fall in profits and a direct hit on production capacity.

So who’s right here? Say or Keynes? Is it the supply which creates its own demand or is it demand which creates its own supply?  Well arguments are definitely not my point but the deep slipping curve is an indication of equilibrium disturbance and to correct it, a counter measure is required. Thus the correction of supply disturbances can be offset by a demand catalyst.

 Correcting the demand curve and the capital injection

English: An example of demand curve
English: An example of demand curve (Photo credit: Wikipedia)

Recession is the demand curve not meeting the supply curve at an equilibrium price point. The demand decreases leaving the supply at the same place with pricing which creates the shock. To overcome this shock, stimulus or, you can say, ‘free money” can be injected into the economy so that people can have more money in their hands to splurge and thus raise the demand curve. This cannot be done if the government gives free cash directly into people’s hands because that way there is a danger of liquidity trap as the population tends to think that the recession is bound to continue and they simply hoard the received direct cash. Therefore, the investment route is the way stimulus packages find their ways into public pockets as this money invested is going to stimulate the dull and weakened production facilities and the workers thus get a heavier incentive which, when the workers become consumers, takes shape of the demand being increased to the previous levels thus equilibration of the economy occurs.

 Escaping liquidity traps

The cash (liquidity) that is pumped into the system is always in a danger of being hoarded by the people due to the incisive fear projected among themselves about the dangers of falling into a fairly decayed investment. This hoarding of cash among people can be averted by keeping the interest rates high thus encouraging them to invest and that would galvanize the money to keep circulating thus increasing the velocity of money.

You may also like:

Understanding Interest Rates

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The Budget Line

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©The Idea Bucket, 2013. Submitted by team-member, Mikky.

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