3. Consumer spending on durables falls, draw a graph to analyze the effects of this change in real interset.
4. The Canadian demand for Mexican Pesos is downward sloping and supply of pesos is upward sloping. Assume a system of flexible exchange rate between Mexico and Canada, graphically illustrate and explain how each of the following would affect market value of Mexican Pesos.
a) Mexico encounters severe recession
b) the Mexico government encourages foreign investment in Mexico by tax policies.
5. What effects would each of the following have on equilibrium output and price?
a) an increase of the aggregate supply and a decrease in aggregate demand.
b) an equal increase in both aggregate supply and aggregate demand
i have these same questions as you, have you made any progress? i'm still trying to figure out these questions right now, but will post if I find anything.
Hi it's me again (Nicole).
I think I have #3.
Reduced spending means a decrease in demand. Due to this decrease in demand the real interest rate will fall. This keeps prices lower. The graph is pretty standard.
hey i have the same questions too. did any of u get number 4 or 5
3. To analyze the effects of a fall in consumer spending on durables on real interest, we need to understand the relationship between consumer spending on durables and interest rates. In general, when consumer spending on durables falls, it indicates a decrease in overall economic activity, which can have an impact on interest rates.
To draw a graph, we can use a simple supply and demand framework for the loanable funds market. In this market, the demand for loanable funds comes from borrowers (investors, individuals, and businesses) who want to borrow money for investment or consumption purposes, while the supply of loanable funds comes from savers who are willing to lend money.
On the vertical axis, we have the real interest rate. On the horizontal axis, we have the quantity of loanable funds. The demand curve slopes downward because as the interest rates decrease, the quantity of loanable funds demanded increases. The supply curve slopes upward because as the interest rates increase, the quantity of loanable funds supplied increases.
To analyze the effects of a fall in consumer spending on durables, we shift the demand curve for loanable funds to the left. This shift indicates a decrease in the overall demand for loans due to lower consumer spending on durables. As a result, the equilibrium real interest rate decreases, and the equilibrium quantity of loanable funds decreases as well.
4. To graphically illustrate and explain how each of the following would affect the market value of Mexican Pesos in a system of flexible exchange rates between Mexico and Canada:
a) If Mexico encounters a severe recession, it can lead to a decrease in demand for Mexican Pesos from Canadian consumers and businesses. This would be depicted by a leftward shift in the demand curve for Mexican Pesos. As a result, the market value of Mexican Pesos would decrease relative to the Canadian dollar, indicating a depreciation of the Mexican Peso.
b) If the Mexico government encourages foreign investment in Mexico by tax policies, it can lead to an increase in foreign demand for Mexican Pesos as investors and businesses need to convert their currency to Mexican Pesos. This would be depicted by a rightward shift in the demand curve for Mexican Pesos. As a result, the market value of Mexican Pesos would increase relative to the Canadian dollar, indicating an appreciation of the Mexican Peso.
5. To assess the effects of the following scenarios on equilibrium output and price:
a) An increase in aggregate supply and a decrease in aggregate demand would result in a decrease in equilibrium output and an ambiguous effect on price. When aggregate supply increases, it leads to a higher potential output level. However, a decrease in aggregate demand implies lower overall spending in the economy, which could create a tendency for firms to reduce their production levels. The equilibrium output would therefore be lower than the potential level. The effect on price is ambiguous because it depends on the relative magnitudes of the increase in supply and decrease in demand. If the increase in supply exceeds the decrease in demand, it may lead to a decrease in price. However, if the decrease in demand is larger than the increase in supply, it could result in an increase in price.
b) An equal increase in both aggregate supply and aggregate demand would likely lead to an increase in equilibrium output and an ambiguous effect on price. When both aggregate supply and demand increase, it indicates an expansionary shift in the economy. The increase in aggregate supply allows for higher potential output, and the increase in aggregate demand stimulates overall spending. This combination could result in an increase in equilibrium output. Similar to the previous scenario, the effect on price is ambiguous and depends on the relative magnitudes of the increase in supply and demand. If the increase in demand exceeds the increase in supply, it may lead to an increase in price. However, if the increase in supply is larger than the increase in demand, it could result in a decrease in price.