Question

Briefly answer the following questions; 1. Why when the goods market is at equilibrium, the money market also must be at equilibrium? 2. Elaborate the concept of financial wealth according to Keynes. 3. Explain the relationship between the interest rate and the price of bond. 4. What is a capital loss and a capital gain and how this concept can be used to speculate the future interest rate?

Answer 1

1. Higher Interest rate has great influence of rate of investment. If more investment determines the more production of goods and services. It leads to the demand of the goods. Such demand of the goods determine the equilibrium position of money market and the goods market at same position.

2. According to Keynes, The rate of investment depends upon the availability of sound and speedy financial assistance in the short-period. He also widely propagated the idea of multiplier of investment. Keynes assumes that such Multiplier effect of can attract the large investors in the short-period by borrowing the funds from the banks with low rate of interest just paving the way for mutual positive effect of both investment and finance.

3. The Relationship between the interest rate and price of the band has inverse effect. If the banks increases the interest rate, the price of the bond will tend to fall and if the bank decreases the interest rate, obviously, the price of bond will tend to increase. This is because of the adjustment of the price of the bond accordingly with the increase in the interest rate.

4. Capital gain is the term used by the situation of earning profit, if the seller gains after selling his assets of capital stock. While Capital loss is the term used by the situation of experiencing loss, if the sellers losses after selling his assets of capital stock. Both deals with the Rate of Cost price and the Selling price of the assets related with current market price. Speculation of future interest rates can calculated by analyzing the real market value of the asset in the current situation with deducting it from the depreciation cost. If the depreciation cost is more than the real market real value of the asset, then it can be said as capital loss and vice verse.