The paper "Factors That Determine the Demand for and Supply of Money, According to Yun " is an outstanding example of a macro & microeconomic assignment. The crowding-out effect occurs when the increased interest rates result in a decreased or reduced levels of private investment spending due to increased government borrowing thus dampening the initial increase of total levels of investment spending. In this case, there is a crowding-out effect resulting from the increased levels of interest rate from 4% to 8% lowering the level of investment to $6.5 from $ 8.5.
This could be due to increased government borrowing that encouraged savings, thus the increase in interest rates. (C) ii. when the government has a budget deficit of $1 billion, Real interest rates= 6% Quantity of investment = $7.5 billion which is represented by the demand for loanable funds. Quantity of private saving = $6.5 billion In this case, there is no crowding-out effect. This is because the private sector is able to borrow at the prevailing levels of interest rate, i.e. at a 6% interest rate the level of private investment spending is $ 7.5.
The fact that the level of investment is high than the level of private saving (6.5) implies that individuals are discouraged to save by the low levels of the interest rate. iii. According to (Barro, 1989), the Ricardo-Baro effect is a theory that postulates that when government spending increases the demand for loanable funds reduces, households and firms increase their savings thus the state of the economy remains unchanged. In this case, if the government has a budget deficit the households will respond by increasing their savings thus raising the interest rates which in return will lower the level of investment.
Therefore, the interest rate will be equal to 8% while the level of investment will be $6.5. Question 2: . The official measures of money are M1 and M2. M1 refers to all cash balances available to the public in the form of currency in hands, traveler’ s checks, demand deposits, and other deposits against which the owner can draw checks. On the other hand, M2 comprises M1, time deposits, fixed savings accounts as well as money balances in retail money market mutual funds.
(Hafer and Jansen 1991) Coins are referred to as fiat money meaning that they are a legal tender enforced by the government; therefore, no one can refuse to accept them.
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