Principles of Macroeconomics. Problem Set 2

Transcription

1 Principles of Macroeconomics Problem Set 2 Sherif Khalifa 1. If the Federal Reserve determines the reserve ratio to be 7%, and then buys bonds from the public worth $250 million: Money Multiplier= If the Federal Reserve determines the reserve ratio to be 7%, and then sells bonds to the public worth $350: Money Multiplier= 2. California Bank holds $375 million in deposits and maintains a reserve ratio of 5%. Show the T-account of the bank: Final Money supply= Suppose that the largest depositor withdraws $25 million from the account, show the new T-account: Final Money supply= 1

2 3. If First Bank has deposits=$500,000, reserves=$100,000 and loans=$400,000. Show the T-account of the bank: If the Fed requires banks to hold 5% as reserves: Required reserves= Excess = If the bank decides to decrease its reserves to the required amount. Show the new T- account: 4. The banking system has $100 billion of reserves, none of which are excess. People hold only deposits and no currency, and the reserve requirement is 40%. Show the T-account of the bank: 2

3 5. Suppose that the money supply=$750, Nominal GDP=$2500, and Real GDP=$1250: Velocity of money= Price level= Suppose that the velocity is constant, and the economy s output of goods and services increases by 5% each year. If the Fed keeps the money supply constant: Percentage change in Nominal GDP= Percentage change in the price level= Suppose that the velocity is constant, and the economy s output of goods and services increases by 5% each year. If inflation=0%: Percentage change in money supply= Suppose that the velocity is constant, and the economy s output of goods and services increases by 5% each year. If inflation=10%: Percentage change in money supply= 6. If the tax rate=40%, the nominal interest rate=10%, and the inflation rate=5%: Before tax real interest rate= After tax nominal interest rate= After tax real interest rate= If the tax rate is 40%, the nominal interest rate is 6% and the inflation rate is 2%. Before tax real interest rate= After tax nominal interest rate= After tax real interest rate= 3

4 7. Suppose that the nominal exchange rate is: $1 = 75 Chinese Yuan A hot dog costs 185 yuans in China and $5 in the United States. The real exchange rate= 8. A can of soda costs $0.75 in the United States and 12 canadian dollars in Canada. What is the Canadian dollar/ U.S. dollar exchange rate if purchasing power parity holds? If a monetary expansion causes all prices in Canada to double, what is the Canadian dollar/ U.S. dollar exchange rate? 4

5 9. Consider the open economy model. Suppose that, due to economic uncertainty, American investors decide to invest more in Canada. What happens to the real interest rate, the exchange rate, the net capital ouflow, and the net exports in Canada and in the United States? r S(S) r r 1 D(I+NCO) NCO L 1 L e S(NCO) NCO e 1 D(NX) $ 5

6 10. Consider the AS/AD model. Analyze the effect on the economy in the short run and in the long run after the Congress increases investment tax credits.show how can monetary and fiscal policies react to bring the economy back to its long run equilibrium? P LRAS 1 SRAS 1 P 1 AD 1 Y N Y 6

7 11. Consider the AS/AD model. Analyze the effect on the economy in the short run and in the long run after the Congress decreases import tariffs. Show how can monetary and fiscal policies react to bring the economy back to its long run equilibrium? P LRAS 1 SRAS 1 P 1 AD 1 Y N Y 7

8 12. Suppose the government cut spending by $25 billion, and the marginal propensity to consume=1/4. The government spending multiplier= Determine the final effect of this fiscal policy on aggregate demand? 8

9 13. Suppose the natural rate of unemployment is 6%. On the following graph locate the following points: Actual inflation Expected inflation 5% 3% 3% 5% 5% 5% 3% 3% Inflation Rate LRPC SRPC 2 /High π e U N SRPC 1 /Low π e Unemployment Rate If the economy starts at the last point, to which point would it move to if the Federal Reserve adopts an expansionary monetary policy. Distinguish between the short run and the long run. If the economy starts at the point before last, to which point would it move to if the Federal Reserve adopts a contractionary monetary policy. Distinguish between the short run and the long run. 9