27. Interest rates and the money market.

A too rapid growth rate in the economy may cause inflation. A steady growth rate is preferred. This is the aim of monetary and fiscal policies. The interest rate is determined by the levels of supply and demand in the money market. Money supply is the money in circulation, including cash, money in bank accounts, reserves, etc. If there is limited amount of money available, banks will charge higher price, as demand for money increases. Demand will fall as the interest rate rises. The interest rate will be set by the market at equilibrium point where demand and supply curves meet. The government though can influence on the rate. If the commercial bank has a shortage of cash it has to borrow money from the central bank at its interest rate

28.

Events like wars or natural disasters which cannot be controlled by governments may affect the economy in unexpected ways. Demand-side shocks may occur in the countries heavily dependent on exports. Shocks may be both demand-side and supply-side. They can cause a knock-on effect on the national economy or other economies. When supply-side shocks occur, the supply of raw materials or components is disrupted. When some good is in short supply, its price rises, so do manufacturers' variable costs and their prices.