Answer to Question #253259 in Macroeconomics for G6ix

Question

5. Distinguish between M1 and M2 of the stock of money.

6. What is Money Illusion?

7. Explain three fiscal policy tools of the government.

8. Using examples, explain the three motives of peopleà ƒ ¢ € ˜s demand for money.

Answer 1

Question 5

Cash, checkable (demand) deposits, and traveler's checks are part of the M1 money supply. M2 money supply, which includes M1 plus savings and time deposits, certificates of deposits, and money market funds, are less liquid.

Question 6

According to the money illusion theory, people tend to view their wealth and income in nominal dollar terms rather than in actual dollar ones.

Question 7

Because it can raise or lower real GDP, government expenditure is a fiscal policy tool. The government can influence economic output by altering government spending.

Because changes in taxes affect the average consumer's income and changes in consumption lead to changes in real GDP, taxes are a fiscal policy tool.

Social Security, welfare, and unemployment cheques are examples of transfer payments. Regularly, these checks are distributed around the country, providing money to tens of millions of people.

Question 8

Transactions are the driving force. The fact that most transactions include an exchange of money is the transaction reason for requesting money. Money will be sought since it is vital to have money available for transactions.

This is a precautionary motive. People frequently seek money as a form of insurance against the unknown future. Medical or car repair bills, for example, are often unexpected and require prompt payment.

Motive is speculative. Money, like other forms of a store of value, is a valuable asset. The rate of return and the opportunity cost of an asset determine its demand. Money assets typically yield no return and frequently decrease in value owing to inflation.