Decreases in the money supply affect the economy indirectly because a. interest rates decrease causing planned investment to increase, which causes an increase in aggregate demand. b. people spend excess money balances and thus, aggregate demand increases. c. interest rates increase, causing planned investment to decrease, which causes a decrease in aggregate demand. d. people have insufficient money balances and thus aggregate demand decreases. e. there is no indirect effect of the money supply on the economy.
The correct answer is option C.
A decrease in the money supply would reduce the availability of credit in the market. The money supply curve will shift to the left. This would further cause the interest rate to increase.
This increase in the interest rate would increase the cost of borrowing. As a result, the cost of borrowing will increase. This will cause the planned investment to decline.
Since investment expenditure is a component of aggregate demand, a decline in the investment will cause the aggregate demand to decrease as well.
B .An increase in imports into the United States and a decrease in exports to Mexico, which will cause a decrease in aggregate demand and real GDP
Explanation: Both the United state and Mexico are involved in international trade between the two countries in this scenario. So if there is a an appreciation in the Dollars there will be increased in importation into the United States, since fewer dollars will be required to import items. This will caused decrease in export to Mexico which will decreased aggregate demand and real GDP.
(a) Option (c) is correct.
(b) Option (b) is correct.
(a) If there is an unexpected decrease in the oil prices (Positive supply shock) then as a result this will reduce the cost of production of the firms and hence, there is an increase in the supply of the goods. This will shift the aggregate supply curve rightwards.
(b) If all the producers are required to contribute more towards the heath insurance coverage (negative supply shock) then as a result this will increase the cost of production of the producers. So, this will lead to decrease the supply of the goods and also, shift the supply curve leftwards.
An increase in imports into the United Statesand a decrease in exports to Mexico, which will cause a decrease in aggregate demand and real GDP.
Exchange rate is the rate at which one currency can be exchanged for another. When a currency appreciates it becomes stronger against the other currency.
For example if the dollar becomes stronger than the peso, the dollar will be able to buy more pesos than before. The pesos will also be able to buy less dollars than before.
As Mexican products are now cheaper there will be increased imports into the United States.
US goods will be more expensive for Mexico, so they will buy less of US goods. United States exports will reduce.
This will eventually lead to a reduction in aggregate sand and real GDP since US sale of US goods has declined.
C) An increase in imports into the United States and a decrease in exports to Canada, which will cause a decrease in aggregate demand and real GDP.
This is because an appreciation in dollar increases the price of computers for Canada which are purchased via USD. This reduces the Canadian demand for computers. This also means that as USD is now stronger they can buy Canadian products as cheaper. This then increases the imports in to the USA and decreases the exports.
As the exports have fallen and more American demand is for the imports, aggregate demand and GDP which is associated with locally produced goods - falls.
Hope that helps.
C. inflation caused by decreases in aggregate supply that are not matched by decreases in aggregate demand
Inflation occurs when the cost of a basket of goods increases over a period of time. The purchasing power of money is reduced. It is characterised by low supply and high demand.
There are two drivers of inflation: cost push inflation and demand pull inflation.
Cost push inflation results when there is an increase in cost of production of goods and services.
This reduces the amount of goods supplied and increases their price.
Demand does not reduce in this scenario, so reduced supply does not match the excess demand.
On the other hand demand pull inflation occurs when there is increased demand for goods and services. Supply cannot meet the increased demand
The United Kingdom produces computers and sells them to Japan. At the same time Japan produces cars and sells them to the United Kingdom. Suppose there is an appreciation in the pound. This will cause: an increase in imports into the United Kingdom and a decrease in exports to Japan, which will cause a decrease in aggregate demand and real GDP - Option C.
Option C is the correct answer choice, the reason being that an appreciation in the value of the pound will mean that the UK's goods will look more costly. This will mean that imports of foreign goods into the UK will rise whereas exports of UK goods will fall.