Economics Exam Notes
Economics Exam Notes
Question 1. (Chapter 31, pg759) * Impact of interest rate on spending * Analysis of events which change interest rate in the market * Policies to manage inflation/recession
Impact of interest rate on the economy (ripple effect)
To lower interest rate | | To increase interest rate | | | | | | Central bank buy securities in open market operations and increases money supply | | Central bank sell securities in open market operations and increases money supply | | | | | | Short term interest rate and exchange rate falls | | Short term interest rate and exchange rate rises | | | | | | Qty of money and supply of loanable funds increase | | Qty of money and supply of loanable funds decrease | | | | | | Long term interest rate fall | | Long term interest rate rises | | | | | | Consumption, expenditure, investment, and net export increase | | Consumption, expenditure, investment, and net exports decrease | | | | | | Aggregate demand increases | | Aggregate demand decreases | | | | | | Real GDP growth, employment rate and Inflation rate increases | | Real GDP growth, employment rate and Inflation rate decreases | | | | | | In additional, stock and bond prices rises | | In additional, stock and bond prices falls |
Analysis of events that change interest rate in the market
Money demanded (MD) changes on 3 scenerios: * state of economy * average price level in the economy * people expectation
Money supply (MS) changes only when government implements monetary policies.
Few examples of events that changes interest rate Events | MS | MD | interest rate | graph | Central bank buy securities/bonds | increase | no change | fall | 1 | Central bank sell securites/bonds | decrease | no change | rises | 2 | Recession/bad economy | no change | fall | fall | 3 | high inflation (high expectation) | no change | rise |
Question 1. (Chapter 31, pg759) * Impact of interest rate on spending * Analysis of events which change interest rate in the market * Policies to manage inflation/recession
Impact of interest rate on the economy (ripple effect)
To lower interest rate | | To increase interest rate | | | | | | Central bank buy securities in open market operations and increases money supply | | Central bank sell securities in open market operations and increases money supply | | | | | | Short term interest rate and exchange rate falls | | Short term interest rate and exchange rate rises | | | | | | Qty of money and supply of loanable funds increase | | Qty of money and supply of loanable funds decrease | | | | | | Long term interest rate fall | | Long term interest rate rises | | | | | | Consumption, expenditure, investment, and net export increase | | Consumption, expenditure, investment, and net exports decrease | | | | | | Aggregate demand increases | | Aggregate demand decreases | | | | | | Real GDP growth, employment rate and Inflation rate increases | | Real GDP growth, employment rate and Inflation rate decreases | | | | | | In additional, stock and bond prices rises | | In additional, stock and bond prices falls |
Analysis of events that change interest rate in the market
Money demanded (MD) changes on 3 scenerios: * state of economy * average price level in the economy * people expectation
Money supply (MS) changes only when government implements monetary policies.
Few examples of events that changes interest rate Events | MS | MD | interest rate | graph | Central bank buy securities/bonds | increase | no change | fall | 1 | Central bank sell securites/bonds | decrease | no change | rises | 2 | Recession/bad economy | no change | fall | fall | 3 | high inflation (high expectation) | no change | rise |