Macroeconomics Assignment
Name
Institution Macroeconomic Assignment
Question 1
(a)
A reduction in interest rates is an expansionary move in the sense that it makes borrowing cheaper. A decrease in interest rates, therefore, will lead to an increase in investment but in the process leading to a reduction in the levels of saving since there will be a reduction in the incentive to save. The effects of this action will affect both the consumer and the producer as follows: The Consumer: Lowering interest rates chips at the incentive to save thus the consumer will prefer to hold his money for transaction purposes. Reduced savings, therefore, leads to an increase in the demand for goods and services, subsequently leading to an increase …show more content…
As such, the prices for foreign goods will become cheaper and therefore affordable for the citizens and institutions of the country. However, when the main exports rise in price, the country’s products become expensive for foreign nations (Sikdar, 2006). As a consequence, the aggregate exports demanded by other countries may reduce significantly. In the long run, the imports may exceed the exports (Suranovic, 2005). It is worth noting that in such circumstances, local firms suffer the most. Therefore, firms will be forced to reduce their prices or cut down their levels of …show more content…
The Money Multiplier is the mathematical expression that shows the relationship between the monetary base of an economy and the money supply. Usually, it describes the increase of money in circulation created by banks (Blanchard, 2006). On the other hand, the Income-Expenditure Multiplier is the ratio of change in aggregate production to an autonomous change in total expenditure (Blanchard, 2006).
b) Interest rate and the exchange rate
The interest rates are the annual cost of credit or otherwise, debt capital, normally computed as an annual percentage of the principal amount. Exchange rates, on the other hand, refer to the price of one country’s currency as compared to another country’s currency, computed as the amount of domestic currency required in exchange for a unit of foreign currency (Blanchard, 2006).
c) Balance of payments deficit and the budget deficit
While a balance of payment deficit occurs when a nation’s total import revenues exceed its total export revenues while a budget deficit occurs when the government’s current expenditure exceeds the total income or revenue received through standard operations during a financial year (Suranovic,
Name
Institution Macroeconomic Assignment
Question 1
(a)
A reduction in interest rates is an expansionary move in the sense that it makes borrowing cheaper. A decrease in interest rates, therefore, will lead to an increase in investment but in the process leading to a reduction in the levels of saving since there will be a reduction in the incentive to save. The effects of this action will affect both the consumer and the producer as follows: The Consumer: Lowering interest rates chips at the incentive to save thus the consumer will prefer to hold his money for transaction purposes. Reduced savings, therefore, leads to an increase in the demand for goods and services, subsequently leading to an increase …show more content…
As such, the prices for foreign goods will become cheaper and therefore affordable for the citizens and institutions of the country. However, when the main exports rise in price, the country’s products become expensive for foreign nations (Sikdar, 2006). As a consequence, the aggregate exports demanded by other countries may reduce significantly. In the long run, the imports may exceed the exports (Suranovic, 2005). It is worth noting that in such circumstances, local firms suffer the most. Therefore, firms will be forced to reduce their prices or cut down their levels of …show more content…
The Money Multiplier is the mathematical expression that shows the relationship between the monetary base of an economy and the money supply. Usually, it describes the increase of money in circulation created by banks (Blanchard, 2006). On the other hand, the Income-Expenditure Multiplier is the ratio of change in aggregate production to an autonomous change in total expenditure (Blanchard, 2006).
b) Interest rate and the exchange rate
The interest rates are the annual cost of credit or otherwise, debt capital, normally computed as an annual percentage of the principal amount. Exchange rates, on the other hand, refer to the price of one country’s currency as compared to another country’s currency, computed as the amount of domestic currency required in exchange for a unit of foreign currency (Blanchard, 2006).
c) Balance of payments deficit and the budget deficit
While a balance of payment deficit occurs when a nation’s total import revenues exceed its total export revenues while a budget deficit occurs when the government’s current expenditure exceeds the total income or revenue received through standard operations during a financial year (Suranovic,