Introduction, body conclusion and your opinion with examples.

Q2. Case/situation:

Such inequality could matter for macroeconomics if households with different amounts of wealth respond differently to the same aggregate shock. Indeed, microeconomic studies have often found that the annual marginal propensity to consume out of one-time income shocks (henceforth, the MPC) is substantially larger for low-wealth than for high-wealth households. In the presence of such microeconomic heterogeneity, the aggregate size of, say, a fiscal shock is not sufficient to compute the shock's effect on spending; that effect will depend on how the shock is distributed across categories of households with different MPCs. Poterba (2000) has suggested that the marginal propensity to consume out of wealth may have declined in the 1990s. According to Poterba, the main reason for this decline is the growing importance of equities in household wealth. Since the number of households holding equities is still lower than the number holding many other kinds of assets, and since a growing part of equity investments are held in tax-favored retirement accounts, the marginal propensity to consume out of equity wealth may be small.

Q2. Describe what effect an increase in the marginal propensity to save will have on the slope of the planned aggregate expenditures line and on the size of the multiplier, with examples.

Q3. Case/situation:

The Philosophy of Money, Georg Simmel presents a remarkable and wide-ranging discussion of the social, psychological and philosophical aspects of the money economy. He provides us with a detailed analysis of the circulation and exchange of commodities, while considering the relationship of money to the human personality, the position of women, individual freedom and other key areas of human existence. Through this he creates a series of brilliant insights into the forms which social relationships take and gives us a comprehensive analysis of the interrelationships between the most diverse and seemingly unconnected social and cultural phenomena. This pioneering work by Georg Simmel has increasingly been recognized as an important and influential economic and sociological text.

Q3.Using the above explanation; Describe what is money? Analyze the three functions that money performs. Indicate in your opinion which one is the primary function of money? With examples.

Q4. Case/situation:

I n summer 2007, U.S. and global financial markets found themselves facing a potential financial crisis, and the U.S. Federal Reserve found itself in a difficult situation. It was becoming clear that banks and other financial institutions would ultimately lose tens or even hundreds of billions of dollars from their exposure to subprime mortgage market loans. Bank lending is closely tied to bank capital or net worthspecifically, bank regulators require that loans not exceed a certain multiple of capital. Thus, the Federal Reserve faced the danger of a sharp contraction in credit and bank lending in a way that threatened a deep recession or worse. When this kind of event happens, the job of the central bank is to assure that financial institutions have the necessary funds to conduct their daily business; that they have the "liquidity" they need to make timely payments and transfers.

Q4. Demonstrate what are the three tools of the Federal Reserve? Describe with examples of how each can be used to increase the money supply.