The Real Money Supply - Essay Example

Increased competition in the product market could cause an increase in the equilibrium rate of unemployment. When there is increased competition, firms sell products. The reduction in selling prices forces firms to reduce their production cost through reduction of their labor requirements. Therefore increases the level of unemployment. Increased competition in the product market could cause an increase in the equilibrium rate of unemployment. When there is increased competition, firms sell products.

The reduction in selling prices forces firms to reduce their production cost through reduction of their labor requirements. Therefore increases the level of unemployment.c) TRUE: Fiscal policy includes taxation and government expenditure.  Investment is the function of saving. The government can induce public spending through public investment. If the government investment is a constant figure, then the only option is to manipulate tax. In this situation, the tax increase or decrease can only increase the government expenditure which is exogenous.

Thus no effect on national saving.  I=f(s)Where I; investment and S is national saving. d) TRUE: Multiplier effect is the effect of a change in investment on income ‘Y’. It was true that if consumption and investment are exogenous the Keynesian multiplier equals oneQuestion three there is an increase in deposits of bank reserves will lead to less money supply.IS curve-It combines the equilibrium levels where the commodity market is at equilibrium. If interest rates go pup, then the gross domestic product (GDP) goes down.

If interest rates go down, the level of GDP goes up curve- it joins together combinations of the rate of interest and national income at which the monetary sector is at equilibrium.IS curve – Joins the combinations of the rate of interest and levels of income at which the product market is at equilibrium. Factors that cause a shift in LM curve area) Change in transaction demand for money) Change in the speculative demand for money) Change in the money supply increase in money supply will shift the LM curve to the right.

A decrease shifts the LM curve to the left. In our case where there is a decrease in money supply, we expect the LM curve shift to the left. From the above graph, it is evident that the rate of interest goes up from ie to i1. The level of output also goes down from Ye to Yi. The inflation level also goes up due to an increase in interest rate. Therefore we expect the price to go up. The IS curve shifts to the right so that we are at the same level of output Ye, the interest rate remains high and the inflation rate remains high and the inflation rate still remains high.

 Questions 4Government wants to increase want to increase investment while leaving the short-run equilibrium price level unchanged. Policy mix to achieve the government objective involves the use of monetary policy and fiscal policy at the same time. Fiscal policy includes taxation and government expenditure while monetary policy involves the use of interest rates and money supply either an increase or reduction.