Macroeconomic problem Essay Example | Topics and Well Written Essays - 1500 words

Macrostinting problem - Essay ExampleThe amount of funds supplied by the government fixed by Fed hence making it perfectly inelastic. b) In our situation, the equilibrium interest rate will be 5.8% as this is the point of intersection of the make out curve and the bills demand curve. C) When the economy is at full employment, an increase in money supply will non consequent in an increase in the output. In this case, the change magnitude money supplied will result in increased level of inflation. The excess money manage in the economy will chase the same quantity of goods and services thereby making their prices to inflate. Normally, the increases in the money supply is intended to aim economic growth by reducing the level of interest range (Floyd 58). In the case of full employment, all the resources are already utilized and the increased money supplied will not achieve the intended purpose of increasing production level. Besides, the increased inflation will make the local anesthetic currency unstable and dissuade foreign investors from holding the local currency. This laughingstock adversely affect the investment levels and increase the economic problems. Fed decision to increase money supply can be propelled by several factors. First, an increase in money supply can be aimed at increasing the level of expenditure in the economy. By increasing the level of money supply, the government will increase the amount of wealth held by individuals. This makes them increase their expenditure to stimulate economic growth. Money dog-tired in both consumption and investment will increase because of the increase in the disposable income (Floyd 63). Individuals will as well increase the proportion of their investments in bonds, as they will use the excess money to buy bonds and shares in the capital markets. Secondly, Fed can decide to increase the money supply to stimulate investments. An increase in money supply will result in a fall in the nominal interest ra tes, which will further result in the fall in the real interest rates. Due to the fall in interest rates, the cost of borrowings will be reduced. Potential investors will therefrom be encouraged to borrow and acquire capital necessary in pursuing their investment plans. Consequently, the increased investments will increase the level of employment because of the increased economic activities. Sometimes, the government through Fed can decide to increase the level of money supply to cause an increase the price levels by a desirable margin. According to the quantity theory of money, price levels depend directly on the money supply. In the long-run therefore, an increase in money supply will result in an increase in the price level by equal proportion. Fed can have this objective during the period of recession or depression when the level of economic activities is low to stimulate economic activities and increase the quantity of purchases. In addition, a decrease in the interest rates will increase the demand of the local currency hence cause depreciation in the currency. This is because in an open economy, interest rates parity essential always be preserved. This will cause the currency to fall with a further expectation that it will fall faster in the future. The depreciation in the local currency will make the cost of local goods cheaper and attractive thereby causing a surge in both the foreign and local demand (Floyd