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2-What is the crowding-out effect? What sequence of events Must occur in goods and money markets that would bring about such effect? What Does the magnitude of this effect depend on? What can be done to alleviate it Fully or partially?
The tendency for increases in government spending to cause Reductions in planned investment spending by private firms is called crowing- Out effect.
Rising interest rate has a side effect, because it caused Planned investment to decline. Since it is a major component of the total Aggregate output, its decline has a negative effect.
The crowing out effect depends on how sensitive planned Investment spending is to changes in interest rate, if it is very sensitive, Then planned investment spending changes a lot in response to changes in Interest rate.
3- What two main indicators are used to measure money supply In an economy? What major components are included in each one?
M1, which is used for transactions and it includes currency Held outside of the bank, demand deposits, traveler’s check and other checkable Deposits
M2, which includes near monies or close substitutes for the Transactions money, are saving accounts that are easy converted into cash, and It major components are saving accounts, money market mutual funds, small time Deposits, other near monies.