ECS4864 ASSIGNMENT 2 2025 (Answer Guide) – Due 6th June 2025

ECS4864 ASSIGNMENT 2 2025 (Answer Guide) – Due 6th June 2025 Contents Title: How the Financial Sector Interacts with the Real Economy 2 Introduction 2 1. The Nature and Logic of the Conditions for Macroeconomic and Microeconomic Equilibrium 2 1.1 Understanding Microeconomic Equilibrium 2 1.2 Understanding Macroeconomic Equilibrium 3 2. The Circular Flow of Income and the Robertson-Style Budget Equation 4 2.1 The Nature of the Circular Flow in a Monetary Economy 4 2.2 Monetary Injections and Leakages in Detail 5 2.3 Why Wealth Effects Operate Through Injections and Leakages 6 3. The Exogeneity and/or Endogeneity of the Money Stock 6 3.1 Exogenous vs. Endogenous Money: A Conceptual Distinction 6 3.2 The Role of Base Money (BM) and Central Banking 7 3.3 Policy Implications of Endogenous Money 7 4. The Potential Contribution of Price Mechanisms to Resolving Economic Imbalances 8 4.1 Relative Prices and Microeconomic Equilibrium 8 4.2 General Price Level and Macroeconomic Equilibrium 8 4.3 Interest Rates and the Natural Interest Rate Hypothesis 9 5. Why Saving as Recorded in the National Accounts (SNA) Cannot Be Regarded as Available Finance for Investment 10 5.1 The Classical and Keynesian Views of Saving and Investment 10 5.2 Why Most Saving Does Not Become Investment Finance 10 5.3 Retained Earnings and Bank Credit: The Real Sources of Investment 11 6. The Degree to Which Real Economic Growth and Macroeconomic Stability Are Undermined by Too Little Saving or Too Much Financial Elasticity 12 6.1 Too Little Saving: Real Constraint or Red Herring? 12 6.2 Too Much Financial Elasticity: The Hidden Threat 13 Conclusion 14 References 14