The paper “ Official Measures of Money, Factors Determining the Change in the Demand, and Supply of Foreign Exchange in the Foreign Exchange Market” is an informative example of an assignment on macro & microeconomics. Gross investment=$(500,000+400,000) =$900,000, Depreciation=$100,000, Net Investment=$(900,000-100,000) =$800,000. ii) Value at the end of 2012=$(900,000-100,000) =$800,000 b) How much did Lori save in 2012? Explain$10,000.She had an injection of $20,000+$5,300 and consumed $15,300 leaving her with 10,000 balances as savings. ii) What was her wealth at the end of 2012? $9,000Wealth is a measure of the total market value of physical and tangible assets fewer debts owing. c) Suppose that the government has a budget surplus of $1 billion.
What is the real interest rate-8%, the quantity of investment and the quantity of private savings? Does any crowding out occur? The real interest rate will be 6%. Since the government budget is balanced, the investment will equal the savings amount. therefore the number of investments and private savings will equal $8.5billion. (b) Suppose that the government has a budget deficit of $1 billion. What is the real interest rate, the quantity of investment and the quantity of private savings?
Does any crowding out occur? Equilibrium real interest rate is 7%. The equilibrium quantity of loanable funds is $8.0 billion; the quantity of investment is $8.0 billion while the equilibrium quantity of private saving will be $9.0 billion. There is crowding out effect of $500 million of investment. (c) Suppose that the government has a budget deficit of $1 billion and the Ricardo– Barro effect occurs, what are the real interest rate and the quantity of investment? the new real interest rate will be 7%, the quantity of investment is $8 billion, and the quantity of private saving is $8 billion since the Barro effect has no impact on the level of private savings and investment as well as the equilibrium interest rate. Question 2: What are the official measures of money?
(1 mark) Monetary aggregates which include M1(Notes and coins in circulations plus demand deposits), M2(transaction accounts as well as liquid savings accounts +M1) and M3(M1+M2+time deposits, institutional money markets funds and MMDA) The dimension of the liquidity concept which includes the ease to transfer money to GPP and certainty of asset value in money terms. (b) Explain with reason if visa cards, coins, and cheques are money?
(1.5 marks) Visa Card and cheques are forms of representative money. Coins are fiat money since they are intrinsically worthless and inconvertible. (c) Explain the key functions of money? (1.5 marks) The medium of exchange-here money facilitates transactions due to its acceptance as a mode of payment. Store of value-Money is used to transfer value from period t to t+1. Standard of deferred payments-Deferred payments is settled using money. Money is also used as a Transfer of immovable assets and a measure of value for items. (d) Explain the factors that determine the demand for and supply of money, and show how a change in the supply of money (increase/ decrease) can cause a change in the equilibrium interest rate. Demand for money is determined by three motives According to Keynes Liquidity preference theory: Transactionery demand – individuals hold money because it’ s a motion of exchange that can be used to carry out transactions.
It’ s positively related to real income and inflation rates.
Dummies.com. (2014). Exchange rates. Retrieved from dummies.com website: m.dummies.com/hoe-to-determine-exchangerates-and.html
EUCE. (2009). Economic Fluctuations. Retrieved April 2014, from Euro Economics: http://www.unc.edu/depts/europe/euroeconomics/Economic%20Fluctuations.php
Parkin, R. B. (2014). Investment, Saving, and the Real Interest Rate (4th Edition ed.). Foundation of economics.