Intermediate Macroeconomics - Essay Example

Finally the interest rates are increased by the central bank in a manner to curd the increased investment rate. The IS curves shifts up (Farrokh, 2009, 133). Overall, this move by the central bank reduces the investment and controls the spending. There is no crowding out of investments because the increase in interest rate discourages borrowings and reduces lending by the banks hence limits the investments made by individuals and private investors. There are only few people left in the trade market hence the LM curve shifts downward.

However, some economists like Paul Krugman argue that spending by the government causes crowding in instead i.e. investments increases from private sectors but this has not been measured or quantified (Michel and Kevin, 2008, 107) Question 2 The Uncovered Interest Parity (UIP) condition is the condition where the difference in the interest rates of two countries equates to the resulting change in exchange rates of the two countries. The exchange rates are expressed as a comparison of currency in two different countries.

High interest rates in a country correlate with high exchanges. This is examined towards a situation where an increase in interest rates attracts more foreign investments hence causing a rise in exchange rates. This condition is given by the formula (I1-12) =Ee (Hendrik, 2010, 155). Taking an example where UIP exists, assume USA has an interest of 12% and that of Britain is 7%, then the America dollar is expected to depreciate at 5% against the British sterling pound (Maurice, 2009, 169;Michel and Kevin, 2008, 231).

Taking an example where UIP does not exist i.e. a profit is actually realized - exchange rate between the Japanese yen and the U.S. dollar is usually stated in yen per dollar (?/$); assuming that exchange rate increases from , say, ?102 to ?109 is an appreciation of the dollar. The UIP is covered against the risk of falling through hedging (Jeff, 2009, 243). Question 3 The LM curve depicts output and the IS curve depicts exchange rate when nominal rate is flexible. This is because a flexible rate leads to balance of buying and selling of bonds and maintains cash at lower levels than other assets.

The lower interest rates lead to more investment and vice versa. The essence is that people regulate the markets through spending. The goods market IS, depict exchange rate since if the rate is higher of importing products, consumers use local products more and vice versa. This gives a balance or equilibrium. On the other hand if the exchange rate is fixed, the goods market i.e. IS curve depicts output because the central bank is at the control of funds creating reserves to absorb float rates.

Therefore investors’ behavior is directly regulated by the central bank’s decisions (David, 2005, 28). Question 4 For a profit maximizing organization, it is important to hire real labour up to the point where it equals to marginal product labour. Labour is one of the factors of production that is demand driven. If an organization intends to increase its output that relies on workers then they have to hire more labourers and vice versa. The output from any one labourer has its limits i.e.

the margin (Francois & Radu, 2006, 44). When wages are increased, workers tend to substitute work with leisure hence maintaining the normal production output. They further reach a point where the amount of money they earn doesn’t affect the production (Karl, 2007, 260). At this point economists refer to it as marginal utility. Efficiency wages