Answer to Question #31734 in Macroeconomics for dibin
State the difference between:
Money multiplier and income expenditure multiplier.
-between the interest rate and the exchange rate
- between the balance of payments deficit and the budget deficit
-between the trade deficit and net foreign debt (2 marks)
Money multiplier – it’s a mathematical relationship between the monetary base and money supply of an economy. It explains the increase in the amount of cash in circulation generated by the banks' ability to lend money out of their depositors' funds. When a bank makes a loan, it 'creates' money because the loan becomes a new deposit from which the borrower can withdraw cash to spend. Expenditure multiplier – it’s a measure of the change in aggregate production caused by changes in an autonomous expenditure. The expenditures multiplier is the inverse of one minus the slope of the aggregate expenditures line.& The main difference between these definitions is that the money multiplier measures the change in money resulting from a given change in bank reserves and the expenditure multiplier measures the change in aggregate production triggered by changes an autonomous expenditure, including consumption expenditures, investment expenditures, government purchases, or net exports. & Interest rate -& it’s the amount charged, expressed as a percentage of principal, by a lender to a borrower for the use of assets (money).& Exchange rate -& it’s rate at which one currency may be converted into another. & The balance of payments deficit is a situation in which imports of goods, services, investment income and transfers exceed the exports of goods, services, investment income and transfers. The budget deficit is the amount by which government expenditure exceeds income from taxation, customs duties, etc, in any one fiscal year. & Trade deficit – it’s an economic measure of a negative balance of trade in which a country's imports exceeds its exports. A trade deficit represents an outflow of domestic currency to foreign markets. Foreign, or external, debt includes funds that a country or its residents owes to other countries or international institutions. This includes fees for goods and services or outstanding credit that needs to be repaid, with or without interest.