NORTH SOUTH UNIVERSITY

ECO 104
INTRODUCTION TO MACROECONOMICS

ASSIGNMENT

Name :Mst. Meherin Jahan

ID : 2011229042
Section : 24

QUESTION:
1. i) What is productivity?
ii) Describe the factors of productivity.

2. i) Define the Quantity Theory of Money.

ii) What are MS and MD?
iii) Using MS and MD, show graphically and explain how a decrease in MS affects the price level.

Answer to the Question No. 1

i. Productivity in the economy is the measure of how efficiently resources, such as labor and capital, are
used to produce goods and services. It indicates how much output can be generated for a given input.
Higher productivity leads to economic growth and improved living standards, as it means more can be
produced with the same resources or fewer resources.

ii. Certainly, here's a description of the factors of productivity in the economy:

Physical Capital: This refers to the man-made resources used in production. It includes things
like machinery, tools, factories, buildings, and infrastructure. Physical capital helps workers produce
goods and services more efficiently.

Human Capital: Human capital represents the skills, knowledge, experience, and abilities of the
workforce. It's the collective expertise of people in an economy and is crucial for creating and delivering
products and services. Education, training, and health contribute to human capital.

Natural Resources: Natural resources are the elements that come from the environment and are
used in production. These can include land, water, minerals, forests, and other raw materials. Natural
resources are essential for producing goods and are often considered limited, which is why their
sustainable use is important.

Technological Knowledge: This encompasses the advancements, innovations, and know-how that
improve the efficiency and quality of production. It includes discoveries, inventions, and the application
of science and technology to processes, products, and services. Technological knowledge enhances
productivity and economic growth.

1
 These factors are fundamental to economic production and play critical roles in the creation of goods and
services in any economy.

Answer to the Question No. 2

i. The Quantity Theory of Money is an economic theory that suggests a direct relationship between the
quantity of money in an economy and the price level of goods and services.

In its simplest form, it can be expressed as:

MV=PY
Where,
V = velocity of money
P = the price level (GDP Deflator)
Y =the quantity of output (Real GDP)
M = the quantity of money (MS)

ii. In economics, MS and MD refer to the supply and demand for money in an economy.

MS (Money Supply) is the total amount of money available in an economy. It includes physical cash
(coins and paper money) and various types of bank deposits that can be quickly converted into cash. MS
comes in different categories, with M0 being the narrowest (physical cash only) and M3 being the
broadest (includes savings accounts and other less liquid assets).

MD (Money Demand) represents how much money people and businesses want to hold at a given time. It
depends on factors like income, interest rates, price levels, economic uncertainty, and technological
advancements. For instance, when interest rates are high, people may prefer to invest rather than hold
money.

The goal is to keep MS and MD in balance. If there's too much money in circulation (MS > MD), it can
lead to inflation. If there's too little money (MS < MD), it can cause deflation. Central banks, like the
Federal Reserve, manage MS to maintain this balance. They increase or decrease the money supply to
influence economic conditions, such as stimulating growth or controlling inflation.