Principles of Macroeconomic

There are various factors that influence people’s preference for either holding or spending money. The following are some of them.

Change in price: As prices rises rapidly, especially during periods of inflation, consumer’s desire for holding money diminishes. This is because they see money to be less valuable because it will fetch less in future. This creates a preference for spending money now before prices of goods rises. Conversely, when money supply contracts and the price of goods and services fall, demand for money increases because falling prices enable money to buy more in the future.
Availability of substitutes: The ability to find substitutes for holding money is another factor. When the supply of money is rapidly increasing or eroding its purchasing power, there is an attempt on the part of consumers to hold other assets such as commodities. Likewise, if supply of money is decreasing, then the demand for money increases together with its purchasing power.
Credit supply: When credit is ample and easily obtainable, then there is less desire to hold money. On the hand if credit is tight and the ability to borrow money is hard, businesses and consumers will increase their desire and preference for cash.
Rate of interest: The rate of interest offered on holding cash is another determining factor. A rapid increase in the amount of money supplied can lower the rate of interest offered for money in the short-term (Puplava par 9)

How does the Federal Reserve’s Monetary Policy tool influence market interest rates?

It does this through Open market operations, discounts, and control over reserve requirements. Federal Reserve authorities supply banks with additional reserve funds through open-market purchases. The sale of these securities diminishes such funds.

Through the power to discount and make advances, the Federal Reserve authorities are able to supply individual banks with additional reserve funds. The funds are made more or less expensive for member banks by raising or lowering the discount rate.

Raising or lowering requirements-within the limits imposed by law on the board of governors concerning the reserves that banks maintain on deposit with the reserve banks has the effect of diminishing or enlarging the volume of funds that member banks have available for lending. How does expansionary and contractionary monetary policies affect equilibrium real GDP and the price level in the short run?

Expansionary policy is a monetary policy that increases aggregate demand, this leads to higher investment and consumer spending, and this improves on real GDP.

Contractionary policy is a monetary policy that reduces aggregate demand; this reduces investment and consumer spending reducing real GDP.

What is the equation of exchange? And show how does an increase in the quantity of money lead to proportionate increase in the price level?

The equation of exchange states that the quantity of money (M) multiplied by the velocity of circulation (V) equals GDP or MV=PY. P stands for price level and Y is the real GDP. From the equation, it can be seen that a change in quantity of money brings about an equal change in the price level. They are directly proportional.

Why is it that the Federal Reserve Cannot stabilize the Money supply and the interest rate simultaneously?

This is because, to target a market interest rate, the Federal Reserve must adjust the money as necessary when the demand for money changes, to target the money supply, it must permit the interest rate to vary when the demand for money changes. They cant occur simultaneously (Miller par. 38)

How can a nation and its producers determine whether or not it has a comparative advantage in producing a particular good and service?

When the nation sees that it has some ‘margin of superiority’ in producing a certain product i.e. where the marginal cost of production is lower.

After NAFTA was signed, the United States allowed more tomatoes to be imported from Mexico. What happened to the price of tomatoes in the United States when the United States allowed more tomatoes to be imported?

The tomato prices in the US fell drastically. It even led to some Florida growers filing a case against Mexico charging that they were selling tomatoes at below market price causing them to incur huge losses.

During 2007, as oil and gas prices continued to increase, a growing number of Americans called for the United States to become less reliant on Middle-Eastern oil. Would it make sense for the United States to try to become totally self – reliant in the production of oil? Why or why not?

America can not be self reliant in the production of oil especially, keeping in mind that it only has 3% of the world’s oil reserves. Also the energy demand in the US is too high in that if it stops or reduces its oil imports from the Middle East, there will be an energy crisis in the Nation.

a) Domestic, price= $ 400 per set

Quantity = 1 million sets per year.

b) Eight million

c) Two million

d) Six million

e) Opportunity cost of producing the 4- million sets in the US

= (800 X 6) OR (600 X 8) – (1000 X 4)

=4800 – 4000

= $800 Million (Rapsomanikis & Sarris par 5), impact of domestic and international price on a country’s income.