Answer to Question #124147 in Macroeconomics for yvonne

Question

. (a) Use a graphical approach to explain the effect of the following changes.
i. A new Covid 19 face mask, made in America, is successful in sales to Zambia.
ii. Zambia reduces its interest rate compared to the U.S., causing investors to sell Zambian bonds and buy U.S. bonds.
iii. Zambians, unhappy with monetary unification, transfer their bank balances to the U.S.

(b) Briefly explain the five functions of money

Answer 1

Q(a)

1). When the demand for the American made face masks is successful in Zambia the following happens:

i.   There is a shift in supply – the supply curve shifts to the left, from So to S1 and the prices moves from Po to P1 and quantity moves from Qo to Q1 where else the equilibrium price shifts from Eo to E1, this is basically due to the increase demand for the mask. On the other hand

ii.    There is a shift in demand to the left- when the complimentary good (FOR EXAMPLE LOCALLY MADE FACE MASKS) lowers its prices the demand shift to the left from Qo to Q2 and thus forming a new demand curve D1 from the original D(o).

2). When Zambia reduced the interest rates compared to the US, the investors did sell their Zambian bonds and purchased the USA's bonds this is because the Zambian bonds became expensive as compared to the US bonds which were now cheaper. Bonds have an inverse relationship to interest rate. When interest rates rise, bond prices fall, and vice-versa.

3). Poor Unification of the monetary policy allow for the rapid spread of money in the Zambian economy which leads to loss of value of the Zambian currency hence forcing the Zambians to transfer their balances to the stable US economy.

Question(B). Functions of money:

1)Mediums of Exchange: money provides the most efficient means of satisfying wants; barter trade was the first medium of exchange it involved the exchange of either goods for goods or goods for services, when money was introduced it solved various issues of barter trade like the lack of double coincidence of wants where as money is easy to use, suitable, portable, unique and acceptable by everyone.

2)Measure of Value: money acts a measuring rod for everything; money being an accepted medium of exchange is used to determine the cost of a particular product or service.

3)Store of Value :money is used as a store of purchasing power; money being an asset which can be saved and effectively retrieved at a later date it is said to have stored value.

4)Unit of account : money is used to measure and record financial transactions as also the value of goods or services produced in a country over time; Money being accepted by everyone it can be used to represent values on products and services therefore allowing comparison.

5)Basis of credit: money facilitates loans; money allows for individuals to be able to acquire loans that enables them to acquire the products or service that they need most and pay in the future within the loans terms.

6) A Standard of Postponed Payment: money is used a medium of exchange but payment done at an interval for example you can buy a product and for it at an installment( hire-purchase)