Macroeconomics Assignment 4 – Lessons 7& 8 Solutions 1. What distinguishes money from other assets in the economy? (2 Mark) ANS: Money is different from other assets in the economy because it is the most liquid asset available. Other assets vary widely in their liquidity. 2. What are demand deposits, and why should they be included in the stock of money? (2 Mark) ANS: Demand deposits are balances in bank accounts that depositors can assess on demand simply by
wages, and the effectiveness of the job search. Growth in money supply is the primary determinant of the inflation rate, and it is controlled by Bartavia’s central bank. Therefore, inflation and unemployment do not affect one another in the long-run. However, inflation and unemployment affect one another in the short-run. There is a short-run trade-off between inflation and unemployment, as exemplified by the Phillips curve. The Phillips curve is a downward sloping line that shows the trade-off, as
2.2 Conceptual Framework of Quantity Theory of Money A number of frameworks have been introduced by the economists regarding the concept of Quantity Theory of Money. Ajuzie Immanuel, et.al. (2008) opines as “The concept of the Quantity Theory of Money (QTM) was introduced in the economic theory in the 16th century. Jean Boldin in his book reprinted in 1924 argued that the reasons for the rise in French prices were abundance of gold and silver, monopolies, scarcity, the pleasure of princes, and devaluation
lasting impressions, often making attributions to the theories we know today. One of these individuals who influenced economics in this way was Irving Fisher. Irving Fisher was a very unique and brilliant man. He attended Yale University where he studied mathematics. He later used this background and applied it to economics, earning a PhD in economics, the first from Yale University. His study of mathematics played a crucial role in how his theories evolved. Almost all of his work involves mathematical
2.4 Keynesian Views on Money-Price Relationship Keynes accepted the classical view that increase in money supply causes rising prices or inflation only when the aggregate output corresponds to full employment and aggregate supply curve is vertical. Keynes published an article entitled ‘How to Pay for the War’ in 1940, in which he developed a demand side model incorporating inflation process with temporarily rigid prices in the labor market. The primary concern of Keynes was to provide space for
c. and unemployment rise. d. and unemployment fall. ANS: A PTS: 1 DIF: 2 REF: 35-1 TOP: Fiscal policy MSC: Analytical 13. If the central bank increases the money supply, in the short run, prices a. rise and unemployment falls. b. fall and unemployment rises. c. and unemployment rise. d. and unemployment fall. ANS: A PTS: 1 DIF: 2 REF: 35-1 TOP: Expansionary policy MSC: Analytical 14. Unemployment
2.3 Quantity Theory of Money in the Early Twentieth Century The classical (e.g. Adam Smith, David Hume, David Ricardo, and John Stuart Mill) and the neoclassical schools (e.g. Alfred Marshall, A. C. Pigou, Irving Fisher ) state that inflation is a monetary phenomena (Snowdon and Vane, 2005). According to Classicists, volume of money determines the price level in the economy that operates with full employment and relative prices are determined by demand for and supply of real goods. These economists
To begin, The Federal Reserve System opted to raise interest rates that were placed near zero years ago in order to aid the economy’s growth and prevent inflation from exceeding the target number. Several factors including: the five percent drop in the unemployment rate, and the increase in wages, and the outlook on future inflation contributed to the Federal Reserve’s decision take this action. However, the increase in interest rates in December has generated mixed results, and it appeared the Federal
Steven Tian Yi Zhang “Models of the Phillips curve/aggregate supply relationship based on flexible wages and prices fail to explain persistence in both the price level and inflation whereas those based on nominal rigidities readily explain both.“ Discuss. The statement that “models of the Phillips curve/aggregate supply relationship based on flexible wages and prices fail to explain persistence in both the price level and inflation whereas those based on nominal rigidities readily explain both”
Citizens don’t know of the importance of inflation and how it can affect them directly. Inflation is caused by an imbalance of demand and supply, where prices of the goods and services increase at an ongoing pace. The purchasing power will drop, and the money citizens have will be worth less. Inflation can either be good or bad. It is considered that if the inflation rate is between 0% and 2% is positive, otherwise, when is negative or bigger than 2%, the inflation is negative. The most frequent measures