Question

Describe

1.

Explain how to find the equilibrium interest rate in an economy with

government bonds

2,

Explain why people save more with a temporary income change than with

a permanent income change

Answer 1

1. Explain how to find the equilibrium interest rate in an economy with

government bonds

1. When the Federal Reserve sets an interest rate higher than the equilibrium interest rate, the supply of money -- the amount of money circulating in the economy -- exceeds what individuals and companies want to retain in cash.
2. In graphical terms, the equilibrium interest rate appears at the intersection of the demand for money curve and the supply of money curve.
3. Definition The equilibrium interest rate is tied to the demand and supply of money.
4. This interest rate occurs at the point where the demand for a particular amount of money equals the supply of money.
5. This conversion to cash increases the supply of money, eventually resulting in the lowering of the equilibrium interest rate.
6. Downward Adjustments When the interest rate is lower than the equilibrium interest rate, the amount of money in circulation is insufficient for households to engage in regular, everyday transactions.
7. Tight monetary policy occurs when the Federal Reserve adopts policies that slow economic growth by constricting the supply of money in the economy.

2. Explain why people save more with a temporary income change than with a permanent income change

1. How It Works For example, if a worker is aware that he or she is likely to receive an income bonus at the end of a particular pay period, it is plausible that said worker’s spending in advance of that bonus may change in anticipation of the additional earnings.
2. A worker will save only if his or her current income is higher than the anticipated level of permanent income, in order to guard against future declines in income.
3. The permanent income hypothesis is a theory of consumer spending stating that people will spend money at a level consistent with their expected long-term average income.
4. What Is the Permanent Income Hypothesis? The permanent income hypothesis is a theory of consumer spending stating that people will spend money at a level consistent with their expected long-term average income.
5. Changes over time, however—through incremental salary raises or the assumption of new long-term jobs that bring higher, sustained pay—can lead to changes in permanent income.