Question

Y, and AD-AS),.. 81. In the long run, an increase in the supply of money does what? 82. Investment drives the business cycle because 83. The main caus e of cyclical recessions and depressions 84. The growth of GDP with no change in MV would do what to AS, AD, and p? 85. Suppose the U.S. Treasury finances a budget deficit by selling bonds the U.S. public. The money supply will 86. Is a central bank is needed by a modern economy? 87. One negative aspect of Henry George's land tax today would be 88. The GDP deflator reflects the 89. Which of the following is the most accurate statement about the relationship between the nominal interest rate and the real interest rate? 90. If there is shortage of loanable funds, then what happens to the supply and demand for loanable funds?

Answer 1

Ans 81- In the long run an increase/decrease in money supply does change only the price level, it does not change the output level and the interest rate. In short run an increase in money supple shifts the interest rate lower, increasing the investment level in the economy which increases the consumer demand in the economy, shifting AD to its right. It will set up a new equilibrium in the short run with high prices and output level, which shifts the nominal wages up causing aggregate supply curve to shift leftward, this process ends up when equilibrium comes at a point above the price level where we started and at the same level of output.

2 25 26 27 29 30 10 Mo AD uesday

Ans 82 - Investment drives the business cycle because as the investment increases in the economy demand boost up automatically. There are two reasons for increasing demand, one is no one will increase investment until and unless they get some return from the market, Second is they must have some money with them, this is the reason they are investing in the economy. When there is lower interest rates in economy, investment boost up and capital in the economy rises and vice versa. Investment is inversely related to interest rate. If one rises other falls. When interest rate are lower, investment rises, capital in the economy rises, employment rises, inflation falls, deficit falls and many more impact on the economy. These things tells that investment drives the business cycle because it can take many things up-down.

Ans 83 - The business cycle is the periodic but irregular up-and-down movement in economic activity, measured by fluctuations in real gross domestic product (GDP) and other macroeconomic variables. A business cycle is typically characterized by four phases—recession, recovery, growth, and decline—that repeat themselves over time. Economists note, however, that complete business cycles vary in length. The duration of business cycles can be anywhere from about two to twelve years, with most cycles averaging six years in length. Recession also sometimes referred to as a tough time for a economy and there starts a  period of reduced economic activity in which levels of buying, selling, production, and employment typically diminish. A particularly severe recession is known as a depression.

Ans 85 - If US reduces its deficit with the help of selling bonds to the US public. It will collect a huge amount of money from public in exchange of bonds, this will absorb all extra cash from the economy and hand it over to the US government which will reduce the money supply in the economy.

Ans 86 - Yes, it is very much needed even in the modern economy because its importance have risen as the world become globalized in past few years and it helps in maintaining laisez-faire economy to have a secure financial system across the world and it needs time to time intervention from the central bank. The main function of central bank are, regulating the money supply, managing the foreign exchange and gold reserves in a country, managing the cost of credit and it’s availability, Acting as the lender of last resort.

Ans 87- A land value tax according to George Henry tax system is a progressive tax, in that the tax burden falls on titleholders in proportion to the value of locations, the ownership of which is highly correlated with overall wealth and income. The problem with this is tax is collected from the location, if your specific location of land is not good and surrounding is perfect, you have to pay huge taxes whereas your land is not so good. Conversely if you own a huge area of land and maintain surrounding locality good, everyone around you have to pay huge tax. This could leads to externality in the economy.

Ans 88 - GDP deflator is (price deflator to GDP) is a measure in the economy to know the prices of new, old domestically goods in the economy.  

Ans 89 - The calculation used to find the real interest rate is the nominal interest rate minus the actual or expected inflation rate.

Ans 90 - If there is shortage of loanable funds, there would be increased demand for loans which would raise prices and the loans quantity increases. In long run supply of loanable funds decreases as well creating a new equilibrium which makes interest rate much higher and loanable funds at the same amount. This is the same case of the first diagram which i have provided in which prices raised, in this case interest rate rises.