Principles of Macroeconomics. Problem Set 2
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1 Pinciples of Macoeconomics Poblem Set 2 Sheif Khalifa 1. (a) If the Fedeal Reseve detemines the eseve atio to be 7%, and then buys bonds fom the public woth $250 million: Money Multiplie= (b) If the Fedeal Reseve detemines the eseve atio to be 7%, and then sells bonds to the public woth $350: Money Multiplie= 2. (a) Califonia Bank holds $375 million in deposits and maintains a eseve atio of 5%. Show the T-account of the bank: Final Money supply= (b) Suppose the lagest deposito withdaws $25 million fom the account, show the new T-account of the bank: Final Money supply= 1
2 3. If Fist Bank has deposits=$500,000, eseves=$100,000 and loans=$400,000. Show the T-account of the bank: If the Fed equies banks to hold 5% as eseves: Requied eseves= Excess = If Fist Bank decides to decease its eseves to the equied amount. Show the new T-account of the bank: 4. The banking system has $100 billion of eseves, none of which ae excess. People hold only deposits and no cuency, and the eseve equiement is 40%. Show the T-account of the banks: 2
3 5. (a) Suppose that the money supply=$750, Nominal GDP=$2500, and Real GDP=$1250: Velocity of money= Pice level= (b) Suppose that the velocity is constant, and the economy s output of goods and sevices inceases by 5% each yea. If the Fed keeps the money supply constant: Pecentage change in Nominal GDP= Pecentage change in the pice level= (c) Suppose that the velocity is constant, and the economy s output of goods and sevices inceases by 5% each yea. If inflation=0%: Pecentage change in money supply= (d) Suppose that the velocity is constant, and the economy s output of goods and sevices inceases by 5% each yea. If inflation=10%: Pecentage change in money supply= 6. (a) If the tax ate=40%, the nominal inteest ate=10%, and the inflation ate=5%: Befoe tax eal inteest ate= Afte tax nominal inteest ate= Afte tax eal inteest ate= (b) If the tax ate is 40%, the nominal inteest ate is 6% and the inflation ate is 2%: Befoe tax eal inteest ate= Afte tax nominal inteest ate= Afte tax eal inteest ate= 3
4 7. (a) Suppose that the nominal exchange ate is: $1 = 75 Yuan A pizza costs 185 yuans in China and $5 in the United States. The eal exchange ate= (b) Suppose a can of soda costs $0.75 in the United States and 12 Yuans in China. What is the Yuan/ U.S. dolla exchange ate if puchasing powe paity holds? 8. (a) If $1=5 Pesos, the U.S. pice =$1 pe hot dog, and the Mexican pice=2 Pesos pe hot dog, then the eal exchange ate is: (b) Assume puchasing powe paity holds. If a Big Mac costs $2 in the U.S., and if $1=10 Mexican pesos, then the pice of a Big Mac in Mexico= 9. Suppose the govenment cut spending by $25 billion, and the maginal popensity to consume=0.25. The govenment spending multiplie= The change on aggegate demand= 4
5 9. Conside the open economy model. Suppose that, due to economic uncetainty, Ameican investos decide to invest moe in Canada. What happens to the eal inteest ate, the exchange ate, net capital outflow, and net expots in Canada and in the United States? Use the gaph to show the shifts in the cuves in both counties. S(S) 1 D(I+) L 1 L e S() e 1 D(NX) $ S(S) 1 D(I+) L 1 L e S() e 1 D(NX) $ 5
6 10. Conside the AS/AD model. Analyze the effect on the economy in the shot un and in the long un afte the following events. Show how can monetay and fiscal policies eact to bing the economy back to its long un equilibium. Use the gaph to show the shifts in the cuves. (a) The Congess inceases investment tax cedits. P LRAS 1 SRAS 1 P 1 AD 1 Y N Y (b) The Congess deceases impot tade taiffs. P LRAS 1 SRAS 1 P 1 AD 1 Y N Y 6
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