Economics by Boyd and Smith - Assignment Example

Part 1 1. According to Boyd and Smith (1) Factors determining the amount of output of an economy are the production technology and production factors since they are able to influence the output of goods and services of an economy. 2. Competitive, Profit-maximize firm decides how much of each factor of production to demand by ensuring that the marginal costs equal the marginal benefits. 4. Cobb-Douglas production function for which capital earns one-fourth of total income is Y=KάLβ, where β=1-ά and that β < 0 and ά > 0. 7. The demand for the economy’s output of goods and services equal the supply when at the interest rate at equilibrium, desire of households to save firms’ balances, investment desires and the quantity of funds that are loanable supplied equals the demanded quantity. Part 2 1.According to Boyd and Smith (2), money is a medium of exchange in ensuring that transactions are carried out, second, a Store of value such that it holds its own value over a longer duration of time, although it does not elevate money so superior because there are other stores of value such as land. However, it is a portable store of value that is available in various convenient denominations, and lastly, it is a unit of account that provides a common measure for the value of commodities and services in exchange, which enables buyers and sellers to know how much of the goods to sell or purchase. 2. Fiat money is money without any intrinsic value while commodity money is the one with intrinsic value and some collateral security e.g. gold. 3. Federal Reserve controls the money supply by : Setting the reserve requirement for banks, through buying and selling treasury bills and notes and by moderating the supply of money through lowering or raising the interest rates which are passed to the banks and finally to the consumers. 4. The equation of the quantity is, M x V = P x Y, where M is the money quantity, V is the money velocity; P is the level of the price, and Y the real Gross Domestic Product. 5. The assumption of constant velocity implies that if an assumption is additional, the money velocity is constant, and then the equation yields a fundamental theory of the money effects known as the money’s quantity theory useful in determining the nominal GDP. 6. Inflation tax is paid by the citizens by being exposed to the inflationary status by the government who causes them to pay off taxes for consumer spending. 7. Raising the inflation from 6 to 8 percent will mean that the currency's interest rate catches up with the higher inflation rising by 6 points a year from their original value leaving the real return on that currency unchanged. 8. Inflations include; International competitiveness, Income redistribution, Boom and Bust Economic Cycles, Cost of Reducing Inflation, Fiscal Drag, Shoe leather costs and Menu Costs. 9. Fiscal and Monetary policies play a role in causing ending hyperinflations, usually done by the central bank or the government to ensure the control of flow of money, and; therefore, minimizing both the exchange rates and the government’s expenditure. 10. The interest rate that is nominal is the stated rate of return on a financial asset e.g. the interest rate that a bank pays on deposition certificate while the real interest rate is the rate, which is nominal on return and one adjusted for inflation. Part 3 1. According to Boyd and Smith (2) net foreign investment is the amount of investment that a country invests in other countries while the trade balance is the quantity of goods either imported or exported. They must be equal for a healthy economy. 2. Nominal exchange rate is the exact foreign exchange that has been adjusted for changes in buying powers, while the real exchange rate is the nominal exchange rate which takes the inflation differentials between nations in consideration. 3. A cut in defense spending causes government to go up and; hence, in a country’s saving. Investment is not altered as the rate of the whole world defines it. Therefore, an increase in a country’s saving causes the S-I schedule to shift to the right and increase the trade balance while causing a fall in the real rate of exchange. 4. Banning the importation of Japanese DVD players by a small open economy, will impact some effects depending on the real investment and can either cause a fall or a decline in all the factors. However, it is more likely that the trade balance will decline with an increase in the interest rates, as well as a rapid fall in the exchange rate. 5. With low inflation in Japan and a high one in Mexico, prices of goods in Mexico will start rising relative to Japanese prices, both Mexican and Japanese consumers will start substituting Japanese for Mexican goods, leading to increases in both the supply of Mexican Peso and the Japanese yen demand which will cause depreciation of the Peso. Part 4 1. According to Boyd and Smith (12), the natural rate of unemployment is triggered by a combination of structural unemployment and frictional unemployment. Frictional unemployment is where new workers or those who shift the jobs take long to get other jobs while Structural unemployment, is where workers who have been unemployed long enough (six months or more), have troubles finding jobs because of lack of skills. 2. Frictional unemployment is where new workers or those who shift the jobs take long to get other jobs while wait unemployment is where people are promised a jobs, and have to wait until that time reaches for them to get the jobs they were promised. 3. The real wage may remain high to the level that balances supply of labor and the demand for labor due to minimum laws on wages the monopoly power of unions, and efficiency wages. Minimum-wage laws cause wages not to fall equilibrium levels. The monopoly power of unions causes wage stagnation since the wages of unionized workers is determined by collective bargaining between firm management and union leaders. Efficiency-wage theories propose that high wages increases productivity of workers. 4. Unemployment cannot assuredly be taken as long term or short term, but depends on the economy of a country and its initiatives to create extra job vacancies. 5. Regressions in the 1960-2000 yielded a constant natural rate of unemployment of approximately 6. 1%, this seems unrealistically high for both the 1990s and the 1950s-1960s. In the late 1970s, there was rising inflation although unemployment was above the natural rate estimates and in the late 1990s the falling inflation with unemployment below the natural rate estimates. Work cited Boyd, Derick and Smith, Ron. Monetary Policy, Central Banking and Economic Performance in the Caribbean. West Indies: University of the West Indies Press. 2011. Print. Read More