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Macro and Micro Economics - 2 - Case Study Example

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The primary tool is “open market operation” under which it would buy government bonds on the open market. It would change the monetary base and increase the circulating money supply in the economy;
iii. It can use “discount window lending” under which it can lend…
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Macro and Micro Economics - 2
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Macro and Micro Economics - 2

Download file to see previous pages... Federal Reserves’s ability to increase the money supply because when the FRB lowers the reserve requirements, the excess reserves increase automatically. The commercial banks would have more freedom in lending out money and money supply would increase.
The MPC of the economy is 1/3. The total government spending is $20 billion. This means that out of $20 billion, $6.66 billion would be spent and the rest would be saved. This $6.66 billion would become the income of subsequent consumers, who would spend $2.22 billion and save the rest. This is a geometric progression and its sum can be found out by the formula 1/1-r. Since MPC is 1/3, MPS becomes 2/3 or 0.66. The multiplier becomes 1.5 (1/0.66). Therefore, the total impact of initial increase of $20 billion is $30 billion ($20 billion* 1.5).
A. Irving Fisher’s equation of exchange is derived from the equation of velocity (V) which is number of times in a year that a dollar is used to purchased goods and services. Firstly, GDP is required to be calculated. Then, the quantity of money in the economy (M) is to be calculated. GDP is divided by M to calculate V. It is given as follows:
B. In the stock market, the timing of investment decisions is of paramount importance. When a major market correction is expected, people look to sell their stocks and increase their holding of money because of the possibility that the market might soon turn into a bear market. During a market correction, the values of the stocks fall and losses are suffered. Therefore, it is better to sell the stock before the “correction” arrives.
A. Imposition of tariffs saves the local producers from the competition of foreign producers. It also brings tax revenue and helps in decreasing the imports of undesirable items. Importantly, it serves for the betterment of balance of trade.
Quotas tend to be more protective than tariffs. They require a lot of paperwork and are hard to administer. Tariffs are easier to manage and unlike quotas, ...Download file to see next pagesRead More
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