Question

Only need (iii) answered thanks

Q6 Consider a closed economy with sectors including Household, Firms, Commercial Banks, Financial Periphery and the Central bank. (0) Develop the balance sheet and the corrending income expenditure matrices for this Develop the balance economy. Incorporate the securitization pros and explain how to derive capital gains on financial assets in this framework. [8] Derive the corresponding income-expenre matrix and derive the saving-investment equilibrium condition for the economy. [7] (111) Since both consumption and investment both impacted by capital gains in this economy, the net impact of capital gains on aggregate demand can be ambiguous. Let x = denote capital gains of the underlying asset. Given the consumption (C ) and investment functions (1 ), with respective partial derivatives as, C = C(Y,x) with Cy > 0,C: >0 and 1 = I(Y,x) with ly > 0, 1x <0, determine the net effect of capital gains (x) on output (Y) and identify the case where the 'wealth effect' drives growth in output in this economy. [10]

Answer 1

The wealth effect is a ehavioral Economic Suggesting that people theory spend their more as the value of assets rise. The idea is that ersumers feel more financially secure and Contident about their Wealth when their homes or Investment porfolios increase in value decrease in the real exchange rate has the effect of increasing het eeports, describes equilibrium in the Market for goods and services where yoccy-T) & l (o) +G and thLM curve describes

money equilibrium in the market where M/P = 2(0,0) as the interest rate falls investment increases, thus increases output