Answer to Question #130179 in Macroeconomics for Tdk

Question

Explain in detail, with the aid of a graph the component of the demand for money

Identify the main determinant of each component

In your graph illustrate each component as well as the total demand for money

2. Explain with the aid of a graph, the impact of a cut in the interest rate on the demand for money

3. Many economists argue in favour of the South African government should implement a policy of privatization. Argue in favour of a policy of privatization

Answer 1

(1) This shows that the demand for money is inversely related to the interest rate.

• At high-interest rates, people prefer to hold bonds (which give a high-interest payment).
• When interest rates fall, holding bonds gives a lower return so people prefer to hold cash.

(2)

If lower interest rates cause a rise in AD, then it will lead to an increase in real GDP (higher rate of economic growth) and an increase in the inflation rate.

(3) Neo-liberal economic theories recommend privatisation as it aims at increasing efficiency, output and profitability as compared to the situation of state-owned enterprises. Thus, the arguments for privatisation are based on the economic grounds and poor performance of PSEs.