AGEC 105 Homework 11

Transcription

1 1. Define the three main functions of money. AGEC 105 Homework Define the three main reasons for the demand for money. 3. What is the main difference between fiat money and a gold standard for money? 4. Fill in the following table. Assume all available funds are loaned out and all loan amounts are deposited. Reserve requirement = 50% (0.50) Change in total reserves = 50,000 Bank Change in Deposits 1 50, Total for Banks 1-4 Change in Reserve Requirements Change in Loans

2 Interest rate b. What is the increase in the money supply created by these four banks? c. What is the total change in the money supply, change in loans made, and change in required reserves assuming all available funds have been fully utilized? Show your work. d. Graphically illustrate the affect that the change in total reserves will have on the equilibrium quantity of money and interest rate. Assume before any changes the MS = 800,000. Money Supply Demand for Money 800,000 Quantity of Money

3 5. What is the total change in the money supply if total reserves decrease by $200,000? Show your work a. Graphically illustrate the affect this change in total reserves had on the equilibrium quantity of money and interest rate on your graph in questions 4d. Be neat and clearly label both changes. Use the original money supply as the starting point. 6. Complete the following table by noting whether the policy is a fiscal or monetary policy and whether the change is expansionary or contractionary. Action Trump and congress decrease the tax rate Fed sells securities Cash for clunkers program Discount rate is raised Discount rate is lowered Spending on national defense is decreased Fed buys securities Reserve requirement is lowered Tax rate is decreased Reserve requirement is raised Policy Fiscal / Monetary Expansionary / Contractionary

4 Price Level 7 Consider the following graph for question 7. AD 0 AS P 0 P FE Y FE Y POT Aggregate Output a. If current aggregate demand is at AD 0 and AS represents aggregate supply, at the equilibrium point is the economy at full employment, has a recessionary gap, or has an inflationary gap? b. If the government s goal is to be at full employment, what type of policy would you suggest the government follow? c. Illustrate the effect of the policy in 7b on equilibrium price and output levels, use the above graph. Be neat and label correctly. d. Give the general inflation rate for your policy change.

5 8. Define crowding out. Provide an explanation for how crowding out occurs. 9. Define the four phases of the business cycle. Provide a graph showing the four phases.

6 Price Level 10. Four theories / causes of business cycles where discussed in class. Provide a 1-2 sentence discussion of each of these four theories. 11. The average work week in an economy coming out of a recession is 34.5 hours per week. Using this value, provide one explanation why the unemployment rate for this economy will most likely not decrease for many months as the economy recovers from the recession. 12. On the following graph, clearly and neatly indicate the difference between demand pull and cost push inflation. AD 0 AS 0 P 0 Y 0 Aggregate Output

7 13. Define the four forms of unemployment? 14. Define the three general types of economic indicators. Know the difference. 15. Use the following economy to answer questions a e. Show your work for full credit Total population 100, ,000 Number of unemployed people 15,000 32,000 Military personnel 10,000 10,000 People under the age of 16 54,000 60,000 Number of people in prison 2,000 2,000 CPI a. Calculate the civilian unemployment rate for the economy in 2008 and b. What year is the base year for the CPI? c. Calculate the annual inflation rate for 2008 and 2009.

8 Price Level Unemployment rate d. Graph the Phillips curve for this economy using the points in 15a and 15c. Does this economy follow the normal Phillips curve? Inflation rate e. Given the inflation and unemployment rates from a and c which type of policy would you suggest the government under take if the goal is to have a growing real economy assuming policies will work as theory suggests. Choices include monetary (expansionary and contractionary) and fiscal policies (demand and / or supply side expansion and contractionary). Use the following graph to support your argument. AD 1 AS 1 P 1 Y 1 Aggregate Output Bonus, from Katie why do cows lick their nose from a bacteria standpoint?