Q.

b. An increase in annual income will increase the quantity of money demanded. This relationship
suggests that money is just like any other normal good. When income increases, people demand more
money at any given interest rate. The diagram below illustrates that the quantity of money demanded at
any given interest rate r will increase as income increases, shifting money demand from D1 to D2. This
shifts the said quantity of money demanded to rise from M to M’. Conversely, the reverse of such events
would decrease the quantity of money demanded at every interest rate, shifting the demand curve to
the left.

The 4-sector economy is comprised of households, business firms, the government, and foreign
countries that initiate economic activities that power up the flow of money in the economy. Each sector
has direct and indirect influences to all other sectors.
For households, they pay taxes to the government and contribute in the export of manpower to foreign
countries. They also provide cash flow to businesses through consumption expenditures as well as
through their savings in the financial markets, which provide businesses investments through borrowing.

Business firms for their part also pay taxes to the government and pay for imports to foreign industries.
They also in turn provide income opportunities for the households through wages, rent, interests, and
profit shares.

The government purchases goods from the business sector and provide wages and sometimes financial
aid to households. Indirectly, the government influences the cash flow from and to foreign countries by
opening up doors for households and business firms to transact with foreign countries through trade
agreements, among others as well as setting policies governing trade.

Moreover, foreign countries provide cash to the economy through foreign remittances for the
households and exports for the business sector. Financial markets also allow the flow of money from the
government to foreign countries and vice versa through lending funds especially because of
globalization.

In sum, the flow of money in a 4-sector economy could be illustrated as follows:

Q.3 b
1. Intermediate goods, which are goods used to produce other goods, must not be added in computing
for the GDP because these are already accounted for in valuation of final products. Adding these again
would result to double counting, which causes an overestimation of the national product.

2. All values of products that are already included in previous periods should be ignored in determining
present GDP as it should only include goods and services that are newly produced during the current
period. Again, committing mistake on this would result to an overstated GDP.

3. In the valuation of products intended for self-consumption, production should be counted at

prevailing market prices.