Md Mosharaf Hossain Nayan

I’d: 2035199660

Course: BUS530.4

3.. How the rate of investment is influenced by savings rate? Do you think excessive
government borrowing from the private commercial banks is good for the investor? Why or
why not? Discuss. 

Ans :

In the commercial bank whatever the money is saved this is mainly for investor. Not for the
government work, now if government starts taking money from that source, availability of
investment is going to decline for investor. As a result there will be less investment. When
government take money from commercial bank. And bank left with less savings, and they
charge high interest rate from the investor. As a result investor don’t like to borrow money
from commercial bank for higher interest rate. And investment declines continuously. So, I
can conclude saying that government borrowing money from the private/commercial bank is
not good for investor.

whether it is investment or saving both depend on interest rate. Investment line is downwards
sloping. Horizontal axis I have taken investment/savings and vertical axis taken interest rate.
Saving lines is perfectly vertical that means how much will be saved or how much money
will be supplied in the economy in a particular year. And that is pretty much predetermined
and fixed. As a result supply line becomes perfectly vertical. According to the saving and
investment line Equilibrium is at point E. and it suggest that interest rate in the market would
be r1 and sabing is s1. if government start borrowing money from the private or commercial
bank which means saving line is going to shift to the left. Because saving will decline. And
total savings will become s2. New equilibrium will be found at point E prime. And according
to E prime interest rate has gone up to r2.

2.  Define inflation. How the components of the quantity theory of money measure inflation
in the economy? Do you think inflation has impact on money market? Discuss.

Ans: generally we understand, Inflation rate is the percentage of increasing of price level in
the market. To describe more we can say that inflation happens when in the market money
losses its value. To understand more clearly, when we by a product with tk 10 and next year
if we buy the same product with tk 12 it means the value tk 10 had last year now it doesn’t
have rather this year tk 12 carries the value of tk 10 of last year. It’s easy to understand
inflation rate through price and GDP, but there are other ways to understand inflation.
Because inflation is not only about increasing the price of products. The main theory is, the
value of money drops so that we cannot buy same product with previous price. Actually
increasing of price is an effect of inflation. To determine and measure inflation rate in the
economy quantity theory is the key. For that we need to understand how the components of
the quantity theory of money measures inflation. The quantity theory of money links the
inflation rate with the growth rate of money. The theory is define as, M*V=P*Y. here V is
constant. Where M= money, V= velocity, P= price and Y=output ( nominal GDP). If we keep
V constant than, change in V would be 0. On the other hand change in price/price is defined
as π. Then the equation stands for, π = change in M/M - change in Y/Y. in economy normal
economic growth needs a certain amount of money supply growth to facilitate the growth in
transactions. If the growth of money supply is higher than the growth in national income
which is included in GDP, then so much money will be needed after few goods and that will
create such a situation that few goods needs more money and thus will cause inflation. Thus
quantity theory of money shows the relationship between money supply growth and inflation.
Inflation has another effect on money market. Because when inflation happens it clearly can
be understood from previous discussion is for few products there are more money. Inflation
rate effects interest rate also. Then the equation happens= I – π this equation shows one and
one relation between inflation and interest rate or money market.

6.  Discuss the limitations of nominal and real GDP calculation method and justify the reason
of introducing chain weighted method of GDP calculation.

When you are calculating GDP by using current years market price this value is called
nominal GDP. in real GDP calculation we are going to consider price of a base year and that
is not going to change. Price of a base year means you are going to consider the quantity
produces in 2021 but that will multiply by the price of a base year. Base years is the year in
which price fluctuation in the economy was minimum, price was stable throughout the year.
And in nominal GDP price and quantity changes each year. That is not fixed. We can not see
the real picture of economy by nominal GDP and real GDP. They doesn’t provide the true
picture of economic growth. Thays because economist introduced new GDP calculation
called chain weighted method. Because in real GDP calculation everything that will matter is
quantity production. In chain weighted method we are not going to put extra emphasis on a
particular year. Rather, base year going to change eery time. and each year will be given
equal preference and equal emphasis. While using chain weighted method we can calculate
the GDP growth rate between two consecutive years. That means we can calculate the growth
rate between 18 and 19, between 16 and 17. But we cannot calculate growth rate between 16
and 19. That’s one limitation of chain weighted method.

4. Define marginal productivity of capital (MPK). How MPK can help the firm to decide about
optimal use of capital in the production process.

The MPK mainly means the additional production that a firms experiences when it adds extra
unit of the capital. Π= TR- CC = Change In TR- Change In CC = Change in (P×Q)- Change
in C =P×MPK - Change in CC This MPKL will help us to decide about the use of the capital
production process. The information in given below, 1. We will borrow more money for the
production when the capital is more ten cost . It is the surplus situation. P×MPK > Π. 2. We
will not borrow money for the production when there is more cost and less earning. This is
the deficit situation. P×MPK < Π . 3. In the balance budget the earning and the cost will be
same to same. We can borrow the right amount of capital in the production process. P×MPK
=Π

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