Question

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Answer each question and explain your answer in the space provided.

1. What determines the proportion of bonds/money that household keeps?

2. What effect an increase of government spending will have on the output equilibrium in the goods market? Explain using autonomous spending.

Answer 1

1). The important factors that determines the proportion of bonds/money that household keeps are :

• Location : where one individual is living and what kind of job is he/she is doing is one of the important factor. If we are working in a city, they companied need a highly skilled person and the level of income will be certainly high when compared to those companies situated in villages.
• Dependants : the number of dependents that one household have determines its savings. The members in the family who are not employed will have to depend on the employed ones.
• Earning through multiple sources : How many households are earning will be added to the total earning of the household. A household can do more than one job inorder to earn more such as freelance, data entry jobs or other part time jobs.
• Regarding the healthcare : The money that we spend in the healthcare can also determines our level of earnings.

2). Autonomous spendings are those necessary spendings made by the government of a nation without considering the overall income level of the citizens. Wen government increases its autonomous spending, its results in the increase of output regardless of its interest rates. If the interest rates are lower, then the equilibrium output of goods and services will increase to higher levels.

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