Answer to Question #111613 in Macroeconomics for AA

Question

1. Suppose the country of Z witnesses an increase in the demand for loanable funds, driven by a recovery from an economic crisis that hit the country few years ago. Will the equilibrium quantities of savings and investment change by more or less than the initial change in the demand? Explain the reasons for the answer.

2. Residents of the land of Q use rubies as money. Every ruby is used, on an average, 4 times per year to carry out transactions. The total supply of rubies is thirty million.
(a) What is the level of aggregate nominal spending in Q according to the quantity theory of money?
(b) Suppose now that the residents of Q use less money to conduct same number of transactions. What is the effect on the velocity of money?
(c) Suppose a new financial product named “bonds” introduced in economy of Q. How the introduction of this new financial product will affect the willingness to hold rubies and consequently the velocity of rubies.

Answer 1

Equilibrium quantities of savings and investment change by more than the initial change in the demand because businesses are able to access loans for investment which will lead to savings