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Microeconomics, main concepts for an economy study: capital formation, production, consumption, employment, credit multiplier, money demand, money supply, prime rate, Keynesian transmission mechanism, exports, imports and government expenditures

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  1. The capital formation (Investment).
    1. The negative relationship between investment and iInterest rates.
    2. The positive relationship between financial investment and interest rates.The impact of government borrowing on interest rates
  2. A reduction in the government expenditure.
  3. A reduction in the exports.
  4. Economic variables studies.
    1. The real GDP.
    2. The private sector capital formation.
    3. The private sector employment.
  5. The real sector: Production and expenditure.
    1. GDP and household consumption.
    2. GDP and government consumption.
    3. GDP and fixed capital formation.
  6. The money demand.
  7. The credit multiplier.
  8. The prime rate.
  9. Decrease in money demand.
  10. The demand for and supply of money.
    1. Increase in interest rate.
    2. Increase in interest rate.
  11. The Keynesian transmission mechanism.
  12. The impact of government borrowing on interest rates.
  13. Linkages between the monetary and the real sector.
  14. Bibliography.

Financial investment and interest rates have a positive relationship. Financial investment represents investment in bonds or shares or money saving in the bank. If the interest rate increases, the return of investment will be better. You will get more return on shares (or bonds) and earn more money on savings. In conclusion, the higher the interest rate, the higher the financial investment. The South African economy continues to grow. The Gross Domestic Product has been on a steady increase on an annual basis, since 1998 (SARB, 2007: S-148). In 1998, the rate of growth was 0,5 % (the lowest in the last decade). In 2006, it was 5,0%. The private sector capital formation (investment) has increased gradually since 1998 (at 4,8%), except for the year 1999 when we observe a negative growth: -7,6%. In 2006, the growth exceeded 12% (SARB, 2007: S-148, S-114-120). The private sector employment declined until 2001. However, since this year, we can observe a change in the trend with a growth of employment rates to reach exceptional figures last year (SARB, 2007: S-132, S-152).

[...] The possible causes for the increase in the interest rate could be: To decrease the supply of money Make the cost of credit more expensive To lower inflation More consumer spending Less consumer savings Greater demand for cash Lower demand for investment Interest rate below money market equilibrium Reserve bank have difficulty in selling of government stock Increase in bank rate means increase in interest rate The Keynesian transmission mechanism Reserve bank lowers repo rate = banks borrow more from RB = money supply increases = portfolios have excess cash = investors buy money market securities = price of securities increases = interest rates decrease = investment increases = aggregate demand increases = inventories decrease = production increases i i Ms Md Money I E C+I1+G+X-M C+I0+G+X-M I1 IO Y The impact of government borrowing on interest rates Government borrowing (to finance budget deficits or increase expenditure) creates the ?crowding effect on private investment, because in effect it pushes up the demand for money and that in turn pushes up interests rates (Fourie 2001:56). [...]


[...] If Y increases, (economy is in an upswing and economic activity increases) more goods are produced and exchanged, and more money is required to conclude transactions, which results in an increased demand for money. Effect of Increase in Income For a decrease in MD will decrease, and curve will move to the left. A decrease in the average price will require less money to conduct transactions, which will lead to a decrease in money demand. Effect of decrease in Price The credit multiplier Total reserve R = 3,5 + 3,5 = = 0.07 Credit multiplier = 1/R = 0.07 = 14.285714 = 14.3 The prime rate The lowest rate at which a clearing bank will lend money to its clients on overdraft is called the prime rate. [...]

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