Question

Summarize

1.Monetary policy tools

2. Quantity equation

3. Okun's law

4. Mutiplier effect and crowding effect

5. Automatic stabilizers

6. Risk aversion and risk taking

Answer 1

1)

Monetary policy tools :

Monetary policy tools refers to the measures taken by a country's central bank to influence the amount of money and credit in its economy. They include Open market operations,Discount rates,Reserve requirements and interest on reserves .

2)

Quantity equation :

MV=PT

The quantity of money in circulation in the economy is directly proportional to the price level of goods and services in the economy. Where V is the velocity of circulation of money and T is the volume of transactions.

3)

Okun's law :

The gap version of Okun's law of macro economics states that for a 1 percent fall in the cyclical unemployment of a country, it's GDP will be roughly 2 percent higher than it's potential GDP and vice versa.

4)

Multiplier effect - is the phenomenon where a change in an external factor (Demand) gets multiplied by a certain factor and is reflected as a change in an internal factor (Income).

Crowding out effect - is a phenomenon where the involvement of government in a market economy drives down the private sector spending and in some cases even eliminates the private players from the economy.

5)

Automatic stabilizers are the adjustments that an economy can make autonomously whose purpose is to offset any fluctuations in a nation's economic activity without a need for the active intervention of policy makers of the Governing body on an case specific basis. Transfer payment systems and corporate and Income tax are known to be good automatic stabilizers.

6)

Risk aversion is that behaviour of humans where, a situation with an unknown payoff is preferred over by a more safer situation with a known but a low expected payoff with the intention of avoiding all uncertainty.

Risk taking is that behaviour of humans where, a situation with an unknown payoff is chosen over a more safer situation involving a lower payoff with the expectation of a higher payoff knowing that it may cause harm to the intentions.