Discussion Questions on Money and Economy - Paper Example

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George Washington University
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Consider what distinguishes money from other assets in the economy.

Money is different from other assets in the economy in that money is the most liquid asset. In a company, assets are listed in terms of its proximity to liquidity and money is the most liquid asset. This means that money can be used at any time in the financial sector to pay financial obligations that a company has. Moreover, the organizations that do not have liquid assets may have other illiquid assets such as real estates. However, given the various fluctuations in the economy due to inflations and the time that company may take to liquidate its assets, money is also accepted as a form of payment.

Consider what is commodity money and fiat money, and which kind we use.

Commodity money is money that has other uses or value for instance jewelry, gold and metal coins. One the other hand, Fiat money is money that is worthless especially if it does not have any guarantee from the government. In other terms, the value of commodity money is derived from the item that the money is made from. If the coin is made from gold, then it is the value of the gold that represents the value of the money. It is also imperative to comprehend that the value of fiat money is dependent on the government that guarantees it. If individuals lose faith in the government being able to guarantee the fiat money, then it loses its value.

Chapter 17

What do you think about the current inflation level of the U.S. economy? Is it high or low? Why?

The current inflation rate in the United States is low. Although the United States economy has continued to recover in the last few years, it is evident that the inflation levels have been consistently below two percent. The have been various market forces both in the international market and in the t United States. There are many reasons as to why the inflation rates are low. Over the past few years, oil prices have consistently dropped thereby leading to low inflation rates as the prices of gasoline have reduced. Moreover, the economy slack in the United States is also responsible for the low inflation rates.

Explain the difference between nominal and real variables and give two examples of each.

Real variables are the variables whereby the effects or impacts of prices and inflation have been removed. On the other hand, nominal variables are the variables whereby the effects or prices and inflation have not been controlled. This means that real variables are affected by prices and inflation while nominal variables are not affected by inflation. Moreover, nominal variables are the variables that are measured regarding monetary units while real variables are measured regarding physical units. The prices of goods, nominal GDP and wages are examples of nominal variables while relative prices, wages and real GDP are examples of real variables.

Chapter 18

Consider how to define net exports and net capital outflow.

Net exports can be defined as the difference between a countrys total value of imports and the total value of exports. Net exports can either be positive or negative depending on whether the country exported more goods or it imported more goods. Net exports are vital to a countrys economy in that it is used to calculate the countrys GDP. A country is said to have a positive balance of trade if the value of the exports made by the country is higher than the value of the goods imported. Net capital outflow can be defined as the net amount of assets that have been invested in a particular country in a foreign country. If the net capital outflow is a positive number, then this means that the country invests more in other countries than other countries invest in it.

Consider how to explain the relationship between saving, investment, and net capital outflow.

In an open economy, net capital outflow, investment, and savings are all related. When capital outflow is added to the domestic investment, then the number derived is the total amount saved. In the bid to invest, individuals need to make savings. In the process of saving, people are building a supply of funds that is available to investment. The ripple effect in this instance is that it increases the net capital outflow of a country.

Chapter 19

Will trade restriction help to increase domestic jobs? Why or why not?

Trade restrictions help in increasing domestic jobs. This is because, with trade restrictions, domestic firms have the advantage of protection from the government especially in industries that do not have established foreign markets. Trade restrictions promote the domestically produced products thereby increasing their market locally. The ripple effect in this instance is that while the demand for a domestic product increases, the demand for labor for the production of these services also increases. This thus increases the domestic jobs that are available.

Consider how to describe supply and demand in the market for loanable funds and the market for foreign-currency exchange. How are these markets linked?

The demand and supply in the market for the loanable funds have its foundations on the supply that is introduced through the national savings while the demand is introduced through the net capital outflow and domestic investment. The capital that is purchased is reliant on whether the demand increases both domestically and internationally. When investors enter a particular market, then the demand increases. Real interest rates also affect the loanable market.


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