ECON 350 - Homework Assignment #4.docx

ECON 350 - Homework Assignment #4.docx - WEEK 4 HOMEWORK...

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WEEK 4 HOMEWORK ASSIGNMENT NAME: Diana Muyibi___ YOU MUST SHOW ALL OF YOUR CALCULATIONS YOU EARN POINTS 1. Explain the costs of each of the following conditions, and explain who bears them. a. Interest-rate instability b. Exchange-rate instability c. Inflation d. Unstable growth - Interest-rate instability causes outputs to be unstable in an economy. It also creates an increase in the risk premium on bonds. When risk premiums are higher, it would ultimately create an increase in costs when firms seek to borrow funds. As a result, firms will then decrease their investments which will then subsequently impact economic growth. - Exchange-rate instability creates unpredictable scenarios where the costs associated with imports as well as the revenue from exports will significantly vary. This will mostly impact investors who are engaged in foreign trade and will potentially harm emerging markets in foreign countries. - Inflation results in economic uncertainty. This in turn will reduce investments and overall economic growth. When inflation is significantly high, the real value of the payments received by lenders will dramatically decrease. Also, individuals who are on fixed salaries will suffer from higher inflation rates as the costs of living will rise as well. - When growth is unstable, individuals will tend to become more uncertain about the future of their earnings. As a result, they will be less willing to borrow from lenders. Another reason for the reduction in borrowing would be the additional uncertainties associated with unstable growth that will subsequently increase risk premiums and make borrowing more costly. When there is a decrease in borrowing, there will also be a reduction in future investing.
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