Macroeconomics Assignment Example | Topics and Well Written Essays - 750 words - 1

Macroeconomics - Assignment Example (a) If all of the currency have been deposited by Fijians in Fijian banks and the reserve ratio targets by the banks is a 100%, then the money in supply is equivalent to the amount of the deposits Fijians have deposited in the banks because they do not retain any amount. The liquidity preference framework shows how changes in demand and supply of money affect interest rates. Increase in equilibrium interest rates is a result of increase in money demand and decrease in money supply. There is a decrease in equilibrium interest rates due to decrease in money demand and increase in money supply. The role of issuing money is assumed by the central bank. Any money supply changes must originate from the central bank monetary policies. Printing more money by the central bank causes an increase in money supply. The central bank changes the money supply through channels. These channels includes buying and selling bonds from the public in exchange for money, changing reserve requirement of banks, and lastly, changing the borrowing rate of discount by banks from the central bank. By using these three tools, the central bank can lower rates of interest by raising the supply of money and increase rates by cutting the money supply. Increase in supply of money causes an increase in money demand and interest rates. The expectation of this is a higher inflation which makes the prices of items to go up. Individuals will tend to consume more and save less. The effect of this will be less capital accumulation. This shows that inflation will have a negative effect on output as people will reduce their labor supply and in turn output contracts. Investment transactions become more expensive, reducing capital accumulation leading to a decline in output. (a) Country PIN produces 4 machines and 3 breads per person and whereas country PANG produces 3machines and 8