Question

1. You have AED 1000 as a cash money and AED 500 in traveler's checks. Also, you have AED 1000 in checking account at Dubai Islamic Bank. At the same bank you put AED 5000 in savings account. Based on this information illustrate how you can change your M1 and M2

2. Which one of the following is most likely to occur if the Central Bank of UAE increasers the Reserve Ratio?

A rise in money supply

An increase in aggregate demand

A rise in Budget surplus

None of the above

3. Suppose for example we have two countries of equal size, Northland and Southland. Both can produce two goods, Food and Clothes. If Southland devoted all its resources to produce 200 tonnes of Food, then can produce 0 tonnes of clothes. If Northland devoted all its resources to produce 100 tonnes of clothes, then can produce 0 tonnes of food. If the Northland trades 40 tonnes of cloths for 70 tons of food from Southland; determine the consumption in each country after trade

Answer 1

Hi,

Hope you are doing well!

Question:

Answer:

1). Answer:

Cash Money = AED 1000

Traveler's Check = AED 500

Checking Account = AED 1000

Saving Account= AED 5000

M1 and M2: M1 and M2 measure money supply in the economy.

M1 = Coins and currency in circulation + checkable (demand) deposit + traveler's checks.

M2 = M1 + savings deposits + money market funds + certificates of deposit + other time deposits.

M1 = AED 1000 + AED 500 + AED 1000 = AED 2500

M1= AED 2500

M2= AED 5000

2). Answer:

None of the above

When the central bank increases reserve ratio then its decrease the money supply and increases interest rate. increasing interest rate decreases the aggregate demand level because higher interest rate increase the cost of borrowing. Increasing cost of money or borrowing decreases the demand of money.

3). Answer:

AS per the question:

We have two countries of equal size, Northland and Southland.

Both can produce two goods, Food and Clothes.

Southland produces 200 tonnes of Food, then can produce 0 tonnes of clothes.

Northland produces 100 tonnes of clothes, then can produce 0 tonnes of food.

The Northland trades 40 tonnes of cloths for 70 tons of food from Southland.

Southland export= 70 tons

Total production = 200 tonns

Consumption = Total production - Total export

= 200 - 70 = 130 tons

So, Southland consume 130 tons of Food.

Northland export = 40 tons

Total production = 100 tons

Consumption = Total production - Total export

= 100 - 40 = 60 tons

So, Northland consume 60 tons of Food.

Thank You