True or false? For a market to have a coordination mechanism, money must be exchanged. Explain.. ?
True or false? For a market to have a coordination mechanism, money must be exchanged. Explain. a.) True. The coordination mechanism that economists recognize is the invisible hand. For the invisible hand to work, there must be an exchange of money. Other mechanisms do not truly coordinate desires and wants. b.) True. Although ways of distributing goods and services are available, such as barter, only markets with money have coordination mechanisms. c.) False. Some markets don’t have explicit prices. They have what are called “shadow prices”—prices paid under the table to avoid taxes. d.) False. Some markets don’t have explicit prices. They have what are called "shadow prices." Economists have developed a way to convert opportunity costs into shadow prices regardless of whether money is exchanged.
Can central banks lend money to private corporations?
Absolutely. In most countries, including the U.S., the central bank routinely lends to banks to help them meet their liquidity needs. Having a lender of last resort that will always provide loans in exchange for collateral helps prevent problems where a bank is solvent but has run out of cash.During crises, central banks sometimes wind up lending money to other types of companies in order to keep credit markets functioning. For example, in its discussion of how it responded to the Financial Crisis, the U.S. Federal Reserve Bank explained:A second set of tools involved the provision of liquidity directly to borrowers and investors in key credit markets. The crisis-related Commercial Paper Funding Facility (CPFF), Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility (AMLF), Money Market Investor Funding Facility (MMIFF), and the Term Asset-Backed Securities Loan Facility (TALF) fall into this category.(Crisis response - Credit and Liquidity Programs and the Balance Sheet)In some countries, usually corrupt ones, the central bank will lend money directly to politically-connected non-financial companies at very attractive rates. That has nothing to do with maintaining financial stability, which is usually a central bank's primary mandate. But it does demonstrate that such lending can happen.Similarly, in China, there have been cases of the People's Bank of China lending directly to state-owned enterprises. You asked about private corporations, but in China the SOEs often act much like politically-connected private companies. The lending in these cases looks very similar to the cronyism I mentioned in the previous paragraph.Ultimately, what a central bank can do is limited only by laws, oversight, and strong institutions.
What is the relationship between saving and investment?
To understand that, you have also to understand the relationship of these concepts with consumption.So consumption represents the final use of a good or service, in other words, consumption means that the resources allocated for that purpose are not allocated anywhere else (“Consumption is destruction” Karl Marx).Saving is a process by which you are not using all the resources to which you have a claim to, meaning that they can now be used to other purposes like investments.When consumers make the decision to save, what they are doing is to make a decision of postponing consumption, because they value consumption in the future versus the present. By putting their savings into a bank, this will increase the supply of money available, meaning that the price of borrowing it will be lower, i.e, interest rates will be lower. And this is where the inter-temporal function of interest rates come into play. By saving now, consumers are saying that that want to consume in the future, through the price (of money) mechanism. Now since managers and entrepreneurs are interest rate sensitive, when interest rates decline, they see this as an opportunity to start investing in long term investment projects.The story is that when finally consumers use up their savings, these investment projects have already been made and can be used to satisfy consumer needs.You can look at it from two perspectives, (1) the real economy, whereby you use actual goods and services, and (2) and the money part of the story.All-in-all savings represent those resources that are not consumed, and can therefor be used in investment projects.
Why can't Indian government pay world bank loan by just printing money?
Excellent answer by Akshat Agarwal. I like mangoes, but I like cakes more.Suppose you have a cake. You hand out tickets to people so they can each get a piece. If you hand out a thousand tickets, either you're going to have to slice the pieces very, very thin, or a lot of people are just going to have worthless tickets. If you hand out just two, each person can have quite a bit of cake. The value of the tickets, then, depends a lot on how many you hand out. That's basically what money is. It's a promise to pay from the government. You get the money and you can trade it with people in that country for stuff. And just like with the cake, if suddenly tons of people have money, either the money ends up being worth very little or most of the people with money get nothing for it. A good example of this from history was Germany in 1922. Faced with a sagging economy and forced to pay massive debts as reparations for World War I, the government started printing money as fast as they could to meet these demands. Paper mills and printing presses were LITERALLY running as fast as they could night and day. Over a period of six months or so, the value of the German mark dropped 3.7 MILLION times! What you could once buy for a mark now cost four million marks. People literally lugged around suitcases full of money to pay bills. Absolutely crazy stuff.