Make My Assignment Consumption Investment And Monetary Policy Economics Essay

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KEYWORDS： Economics Essay， Economics Assignment,经济类论文范文

 

ANS1. Consumption function can be defined as the relationship between consumption and income.

Consumption = f (income) or C = f(y)

Consumption expenditure increases with increase in income. But increase consumption is less than increase in income. Consumption does not increase at the same rate as the income does. It is due to psychological behavior of the people.

In economics, the Hicks-Marshall laws of derived demand assert that, other things equal, the own-wage elasticity of demand for a category of labor is high under the following conditions:

When the price elasticity of demand for the product being produced is high (scale effect). So when final product demand is elastic, an increase in wages will lead to a large change in the quantity of the final product demanded affecting employment greatly.

Make My Assignment Consumption Investment And Monetary Policy Economics Essay

When other factors of production can be easily substituted for the category of labour (substitution effect).

When the supply of other factors of production is highly elastic (that is, usage of other factors of production can be increased without substantially increasing their prices) (substitution effect). That is, employers cannot easily replace labour as doing so will lead to a large increase in other factor prices making it useless.

Thus, in consumption function we came to know about consumption expenditure. But in Marshall's discovery we studied about the demand function. So, in economics consumption function is much more better than Marshall's discovery of demand function.

ANS2. Investment also decrease if saving dropped sharply in the economy because investment in our economy largely depends upon the saving. When the person does not have much saving power and then they will not be able to deposit his saving into bank. When bank get no saving of the people ultimately then banks does not have sufficient money to give loans to the business firms and bank interest rate rises because of less saving of people in bank and when bank rate of interest increases business firm taken less loan from bank and finally investment decreases. Thus, investment is largely depending upon the savings of the people.

ANS3.The various fiscal measures the government of India has taken recently to increase the level of aggregate demand in the economy are:

Taxation and work incentives

Consider the impact of an increase in the basic rate of income tax or an increase in the rate of national insurance contributions. The rise in direct tax has the effect of reducing the post-tax income of those in work because for each hour of work taken the total net income is now lower. This might encourage the individual to work more hours to maintain his/her target income. Conversely, the effect might be to encourage less work since the higher tax might act as a disincentive to work. Of course many workers have little flexibility in the hours that they work. They will be contracted to work a certain number of hours, and changes in direct tax rates will not alter that.

The government has introduced a lower starting rate of income tax for lower income earners. This is designed to provide an incentive for people to work extra hours and keep more of what they earn.

Changes to the tax and benefit system also seek to reduce the risk of the 'poverty trap' - where households on low incomes see little net financial benefit from supplying extra hours of their labour. If tax and benefit reforms can improve incentives and lead to an increase in the labour supply, this will help to reduce the equilibrium rate of unemployment (the NAIRU) and thereby increase the economy's non-inflationary growth rate.

Taxation and the Pattern of Demand

Changes to indirect taxes in particular can have an effect on the pattern of demand for goods and services. For example, the rising value of duty on cigarettes and alcohol is designed to cause a substitution effect among consumers and thereby reduce the demand for what are perceived as "de-merit goods". In contrast, a government financial subsidy to producers has the effect of reducing their costs of production, lowering the market price and encouraging an expansion of demand.

The use of indirect taxation and subsidies is often justified on the grounds of instances of market failure. But there might also be a justification based on achieving a more equitable allocation of resources - e.g. providing basic state health care free at the point of use.

Taxation and business investment decisions

Lower rates of corporation tax and other business taxes can stimulate an increase in business fixed capital investment spending. If planned investment increases, the nation's capital stock can rise and the capital stock per worker employed can rise.

The government might also use tax allowances to stimulate increases in research and development and encourage more business start-ups. A favorable tax regime could also be attractive to inflows of foreign direct investment - a stimulus to the economy that might benefit both aggregate demand and supply. The Irish economy is often touted as an example of how substantial cuts in the rate of corporation tax can act as a magnet for large amounts of inward investment.

Make My Assignment Consumption Investment And Monetary Policy Economics Essay

Fiscal Policy and Aggregate Demand

Traditionally fiscal policy has been seen as an instrument of demand management. This means that changes in spending and taxation can be used "counter-cyclically" to help smooth out some of the volatility of real national output particularly when the economy has experienced an external shock.

Discretionary changes in fiscal policy and automatic stabilizers

Discretionary fiscal changes are deliberate changes in direct and indirect taxation and govt spending - for example a decision by the government to increase total capital spending on the road building budget or increase the allocation of resources going direct into the NHS.

Automatic fiscal changes are changes in tax revenues and government spending arising automatically as the economy moves through different stages of the business cycle. These changes are also known as the automatic stabilizers of fiscal policy

Tax revenues: When the economy is expanding rapidly the amount of tax revenue increases which takes money out of the circular flow of income and spending

Welfare spending: A growing economy means that the government does not have to spend as much on means-tested welfare benefits such as income support and unemployment benefits

Budget balance and the circular flow: A fast-growing economy tends to lead to a net outflow of money from the circular flow. Conversely during a slowdown or a recession, the government normally ends up running a larger budget deficit.

ANS4. The marginal propensity to consume (MPC) indicates what the household sector does with extra income. The MPC indicates the portion of additional income that is used for consumption expenditures. If, for example, the MPC is 0.75, then 75 percent of extra income goes for consumption.

MPC=change in consumption

change in income

The average propensity to consume (APC for short), on the other hand, is the ratio

C/Y =a + bY

Suppose a is positive. That means that the APC is greater than the MPC. As Y increases, a/Y falls, so the APC also falls. Now consider a negative a. That would mean that the APC is less than the MPC, but it increases as income rises.

ANS5. Yes, if quantity theory is true inflation can be costly because we know that there is inverse relationship between value of money and price of commodity and value of money and price can explain the quantity theory of money.

VOM= 1/p

If price of good increases it will lead to decrease in the value of money.

Similarly, if in the economy there is inflation, it means the price of product will get rise and it will further lead to decrease in the value of money.

According to quantity theory of money there is a direct and proportionate relationship between quantity of money and general price level and inverse relationship between quantity of money and value of money.

Equations of quantity theory of money

Transaction approach

Cash balance equation

ASSUMPTIONS

Constant ratio between bank money and Currency money

Money is a medium of exchange

No Hoarding

Full employment

Price level is a passive factor

Constant velocity

Long peroid

ACCORDING TO FISCHER

The quantity theory of money is correct in the sense that the level of prices varies directly with quantity of money and value of trade are not changed.To fisher demand for money is made for transaction motive. Value of money, like any other good is determined at the point where demand for money is equal to supply of money.

Consumers need money to purchase goods and services. The quantity of money is related to the number of pounds exchanged in transactions. The link between transactions and money is expressed in the quantity equation.

On the left hand side, "M" is the quantity of money, "V" is the velocity of money, and "V•M" is essentially a measure of how the money is used to make transactions.

PRINCIPLES:-

The theory above is based on the following hypotheses:

The source of inflation is fundamentally derived from the growth rate of the money supply.

The supply of money is exogenous.

The demand for money, as reflected in its velocity, is a stable function of nominal income, interest rates, and so forth.

The mechanism for injecting money into the economy is not that important in the long run.

The real interest rate is determined by non-monetary factors.

Yes, the inflation will high in short time period, one more thing is it is good for long term only and according to this theory if price will high then income will increase but it will create inflation in short term.

ANS6. (A)As we all know that in the economy there is negative or inverse relationship between investment and rate of interest. So, Investment mainly depend upon the rate of interest. If rate of interest is high, than a businessman will not invest his money in building a factory.

According to this case, Intel is not having much funds in its hand so it is borrowing money on giving some amount of interest. If the rate of interest is higher , than intel should not do any type of investment in building a new-chip making factory.

(B) If Intel has enough of its own funds to finance the new factory without borrowings, so according to my opinion if there is any increase in the rate of interest, it would not affect Intel's decision to build the factory. Intel will do investment in making a new chip-making factory.

ANS7. Savings are money or other assets kept over a long period of time, usually in a bank without any risk of loss or making profit.

Investments are money or other assets purchased with the hope that it will generate income, reduce costs, or appreciate in the future. In an economic sense, an investment is the purchase of goods that are not consumed today but are used in the future to create wealth. In finance, an investment is a monetary asset purchased with the idea that the asset will provide income in the future or appreciate and be sold at a higher price. And usually it has also a risk of some loss

Make My Assignment Consumption Investment And Monetary Policy Economics Essay

As far as we are talking about investment then it is certain amount of money which is saved or use in some projects where we can take profit more than the money we have saved or invested. In general terms investment means the use of money to make more money.

Saving -- Objective: Short term needs Vehicles Used: Bank or money market accounts, CD's Risk: None on balances up to $200,000.00 per depositor (FDIC) Return: Low interest. Key Benefit: Money is safe and accessible.

Investing -- Objective: Long-term capital growth Vehicles Used: Stocks, bonds, mutual funds, tools, parts, equipment upgrades. Risk: Varies, depending on the source of securities owned. Return: Interest paid and capital gains earned. Lower cost of production in the future which allows greater net gains in the future. Key Benefit: Returns have outpaced inflation over the long term.

Getting back to the difference between a saver and an investor, there is one word that separates them, and that word is leverage. One definition of leverage is the ability to do more with less. Saving can be a good vehicle for gain, but only because it protects investors from themselves and from incompetent or unscrupulous advisors. The mistakes that can be made in choosing investments or by holding onto the wrong investments can cost us dearly. But choosing investments well and using them -- that holds the potential for great gains later.

Ans a) As it is clear that purchasing of any asset is a part of investment not a saving because saving means to get money store in banks or lockers. So, my family takes out a mortgage and buy a new house is an investment.

Ans b) It is also clear that anything deposited in a bank is a part of saving not a investment. So, my roommate earns $100 and he deposited that amount into his account at a bank not buying an asset. Here it is savings.

Ans c) It is also a part of investment because I borrow $1000 from bank to buy a car in a hope to earn more by using that car in pizza delivery business.

ANS8. When there is an increase in govt. spending it means that the govt. is doing expenditure and release the money flow in the market. So, it further states that govt. spending lead to increase in money supply and which further lead to investment and saving .

Ans b) In the economy we know that if there is demand in the market the price of the goods and services will effect, it will increase. and if price will increase in the market then govt. will increase the money supply in the economy. And which lead to effect the LM curve. An increase in money supply always reduce the rate of interest. If there is any increase in money supply than ,LM curve also leads to shift rightward.

Ans9. Monetary PolicyÂ

In the UK and US, monetary policy is the most important tool for maintaining low inflation.  In the UK, monetary policy is set by the MPC of the Bank of England. They are given an inflation target by the government. This inflation target is 2%+/-1 and the MPC use interest rates to try and achieve this target.

The first step is for the MPC to try and predict future inflation. They look at various economic statistics and try to decide whether the economy is overheating. If inflation is forecast to increase above the target, the MPC will increase interest rates.

Increased interest rates will help reduce the growth of Aggregate Demand in the economy. The slower growth will then lead to lower inflation. Higher interest rates reduce consumer spending because:

increased interest rates increase the cost of borrowing, reducing spending

Increased interest rates make it more attractive to save money

Increased interest rates reduce the disposable income of those with mortgages 2. Supply Side Policies Supply side policies aim to increase long term competitiveness and productivity. For example, privatization and deregulation were hope to make firms more productive. Therefore, in the long run supply side policies can help reduce inflationary pressures.

ANS10. Desired consumption falls as real interest rate rises will be explained with the relationship between consumption and rate of interest.

Consumption function refers to the functional relationship between aggregate consumption and aggregate income C = f(y). The schedule shows the various amount of consumption at various levels of income. This shows that when income increases, consumption also increases, but in a lesser proportion (i.e.) the proportion of income spent on consumption goes on falling as income increases. A part of additional income is not consumed and is therefore saved.

Rate of Interest: If the interest is high, then people will forgot the present consumption and postpone it for a future date. Higher the rate of interest payable, lesser will be purchasing power. This will certainly reduce the consumption.

Desired investment falls as real interest rate rises will be explained with the relationship between Investment and rate of interest.

Mainly we know that there is the inverse relationship between investment and rate of interest in the economy. It can be explained with the example, that I borrow $2000 for purchase a car on which bank has allowed 15% rate of interest which is much higher. So, I have to pay $300 as rate of interest which is large amount for me. After doing all this calculations I had take important decision that I will not invest money on purchasing a car.

The investment decision is a marginal benefit-marginal cost decision

The marginal benefit from investment is the expected rate of return (r)

The marginal cost is the interest rate (i) that must be paid for borrowed funds; the two are the determinants of

investment spending.

An investment is made if the expected rate of return exceeds the interest rate (r > i). Investments are not made when interest rate exceeds the expected rate of return (r < i)

Expected rate of return:

Businesses only make investments when they expect to recieve profits.

r = (TR - cost of investment) / cost of investment.

Firms are risk takers. therefore, can't guarantee profits.

Firms have to think about expected rate of return must be greater than the real interest rate.