Question

1. In our discussion of the “measure of the Money Supply, M^S, we made the distinction between the various forms of money (actual money and money-denominated assets) as being more or less “liquid.” Briefly but carefully describe the concept of liquidity and explain what makes physical cash – currency in circulation – more “liquid” than, for instance, a money-denominated asset such as a government bond?
   
   
2. Automatic Fiscal stabilizers are beneficial to the economy since they already exist and they don’t take any lengthy government action in order to begin supporting the Canadian economy. Discretionary fiscal policy, on the other hand, can take considerable time to add support to the Canadian economy.
   
   1. Briefly explain WHY discretionary fiscal policy is slow to happen and the steps necessary to put such discretionary fiscal policy into effect.
      
      
3. The ‘modern’ development of the Aggregate Demand, AD and Aggregate Supply, AS model revolves around the “split” of the Aggregate Supply, AS curve into two dimensions: The Short-Run Aggregate Supply, SRAS curve and the Long-Run Aggregate Supply, LRAS curve.
   
   1. Briefly describe each of these SRAS and LRAS curves in the context of the Production Possibility Frontier, PPF.
      
      
4. Briefly explain the difference between the “REAL” and “NOMINAL” measures of Gross Domestic Product, GDP AND why the “Real” measure may provide a better picture of Canadian’s well-offness?

Answer 1

To understand the liquidity of money supply first we have understand the measures of money supply

therefore RBI reserve bank of india has presented four measures of money supply M1, M2, M3 and M4. they can be expressed as below in decreasing order of their liquidity.

M1 MEASUREMENT. this measurement basiacly have narrow definition of money. M1 is one of the most liquid and easier of transaction. it can be measured on at point of time.

M1 = C + DD +OD

WHERE

C- ITS MEANS CURRENCY HELD BY PUBLIC

DD- IT MEANS NET DEMAND DEPOSITS OF THE BANKS

OD- OTHER DEPOSITS HELD BY RBI SUCH AS , INTERNATIONAL MONETARY FUND, WORLD BANK, ETC.

M2 MEASUREMENT. this is also narrow money. therefore its also include saving of people with the post offices beside of M1

M2 = M1 + SOP

WHERE

SOP- SAVING OF PEOPLE

SO WE CAN SAY THAT THESE M1 AND M2 HAS NARROW MEASURE OF MONEY SUPPLY.

THEREFORE M3 AND M4 ARE THE BROAD MEASUREMNT OF MONEY SUPPLY.

M3 MEASUREMNET. M3 IS known as broad money. it is most commonly used measure of money supply. apart from all the components of M1 it include the fixed deposit or term deposits of people with the comercial banks.

we can also say that when when money supply of the any country is measured with M3 then it is called as agregate monetary resourses' of the country.

where

M3 = M1 + net time deposite with commercial bank

   M4 MEASUREMNET. M4 is also broader concept of money supply. or you can that it is broader tham M3 apart from the components of M3. as it includes saving with the post office

where

M4 = M3 + saving with the post office

LIQUIDITY. it means how fast and quickly you can get cash in your hand. in other words you can say that liquidity is means to get your money whenever you need it.

if you compare the currency or cash and liquid asset like government bond you can say cash is more liquid because you dont have to convert cash into cash it already is a meadium of exchange it can used anywhere where govt. bonds cannot be exchanged anywhere they have some limitations and they need to converted into cash. whereas you can say that the cash have shorter exhange cycle than govt. bonds.

3. Diffrence between the real and nominal measure of GDP.- nominal GDP is also known as unadusted GDP, it shows the market value of the final goods which is produced whithin the geogrephical region of the country. market value depend on the quality of goods and services produced or provided within the given price at given period of time where if the change in price from one period to next  the actual output does not, nominal GDP changes when the output remains constant.

where real GDP price changes that may have occured due to inflation. or we can say that real GDP IS an adjustment made in nominal GDP BECAUSE of inflaion. where if the price would change from one period to another but actual output doest not change which means real GDP remains the same. wheres real GDP shows the changes in real poduction. if there is no inflation deflation in the country real and nominal GDP will remain same. we can calculate gdp deflator by dividing nominal GDP by real GDP and multipying by 100.