Macroeconomics Assignment Example | Topics and Well Written Essays - 2000 words

Macroeconomics - Assignment Example From the diagram, the demand of the loanable sum is inversely related to the interest rate (r). Firms generally will compare the expected profitability of investments with the interest rate. At lower interest rates, projects are profitable, and there will be a higher demand for loanable funds. When the government finance the fund from the private pool, the demand increase by the government expenditure minus the tax income (G - T ). The increase in the government financing reduces the availability of loanable sum in the market. Equilibrium of the supply and demand curve is disturbed and shifted to a higher interest rate. Both national saving and investment would be lower. The government loan forces the investor to compete for real interest rate make investment less attractive, assuring that investment will decrease (I shift to I' in diagram) along with the national saving. This is called crowding out. It causes a lower economic growth. Economist generally advises to reduce deficit. When the government switched from public to bank for credit, the supply of loanable fund to the market reduced. This thus causes a shift of the supply line to the left as in the diagram. The result of the reduction of loanable fund is the increase in the interest rates of loan. Private sector or firm will try to reduce their loan due to the high interest. There will not be a lot of projects going on and as a consequence the investment in the country will drop. Both situation 1 and 2 would result in inflation as interest rate increased. 3. large amounts of banknotes are dropped off from a helicopter Answer: When money falls from a helicopter, the supply of money or the saving hold by the public in the market increases. In the diagram, this is illustrated by the shift of supply curve (S) to the right (S'). The household expenditure might increase due to the increase in saving. Thus, the interest rate reduces (from r to r') and the demand of loanable funds increases (from I to I'). From the reduction of interest rate, more loan will be taken out to construct development projects. This is a situation where the money in the market increase without causing inflation. Scenario II In the same economy the money market adheres to the principles of the classical model but the commodity market displays a substantial amount of Keynesian unemployment with stable prices. A few assumption for Keynesian model prices & wages are fixed at a given level at these price & wage levels there is involuntary unemployment (there are workers without a job who would like to work at the going market real wage) Answer the same set of questions as those in Scenario I, namely, explain with the help of appropriate diagrams(s) what happens when 4. the government increases its expenditure and finances it by