Macroeconomics Answers

7. After the reunifi cation of Germany in 1990, payments to rebuild the East led to a major expansion of aggregate demand in Germany. The German central bank responded by slowing money growth and raising German real interest rates. Trace through why this German monetary tightening would be expected to lead to a depreciation of the dollar. Explain why such a depreciation would stimulate economic activity in the United States. Also explain why European countries that had pegged their currencies to the German mark would fi nd themselves plunged into recessions as German interest rates rose and pulled other European rates up with them.

5. In his memoirs, Alan Greenspan wrote, à ƒ ƒ ¢ € œI regret to saybthat Federal Reserve independence is not set in stone.
FOMC discretion is granted by statute and can be withdrawn by statute.à ƒ ƒ ¢ €  (The Age of Turbulence, p. 478 f.) Explain why the independence of a central bank might affect the way in which monetary policy is conducted. If a central bank is not independent, how might its monetary policies change in response to electoral
pressures? Would you recommend that a new country have an independent central bank? Explain.

7. The Federal Reserve is scheduled to pay interest on bank reserves.
a. Suppose that the interest rate on reserves is 1 percentage point below market rates. Would banks still desire to minimize excess reserves? Would this affect the bank money equation in Summary point 8 above?
b. Suppose that the interest rate on reserves is equal to the market rate. How would your answer to achange?
c. Using your answer to b, can you see why the relationship between reserves and bank money becomes very loose when market interest rates are
zero (the à ƒ ƒ ¢ € œliquidity trapà ƒ ƒ ¢ € )?

5. Explain why the best portfolio should not contain any money (use information from Section D of this chapter). How does the notion of the cost of holding money fit into your answer? Would your answer change if your checking account earned a return equal to that of riskfree investments?

3. The implicit cost of checking accounts is equal to the difference between the yield on safe short-term assets (such as Treasury bills) and the interest rate on checking accounts. What are the impacts of the following on the opportunity cost of holding money in checking deposits? a. Before 1980 (when checking deposits had a zero interest rate under law), market interest rates increased from 8 to 9 percent. b. In 2007 (when interest rates on money were one-quarter of market interest rates), interest rates declined from 4 to 2 percent. c. How would you expect the demand for checking deposits to respond to the change in market interest rates under a and b if the elasticity of demand for money with respect to the implicit cost of money is 1?

1. Suppose that banks hold 20 percent of deposits as reserves rather than 10 percent. Assuming that reserves are unchanged, redo the balance sheet in Table 23-7. What is the new ratio of bank deposits to reserves?

Suppose the Economy of Ghana is described by the following equations

Y =C +I+G+X. (income multiplier )

C= 100 + 0.8 Yd (consumption)

I= 200- 600r (investment)

X= 300-0.22Y -400r (Net Exports)

With government spending G = 400, the tax rate t = 0.15, Note that Yd = Y -tY

a) Derive the is curve

b) If r= 20 %. What is the level of income when spending balance occur?

c) What is the multiplier ?

d) Suppose that government spending increases to 700.What is the new level of income ? What is the change in income

1. Suppose that a consumption equation is of the form.
C= 145 + 0.67 Yd where Yd is disposable income.

a. Interpret what the figures 145 and 0.67 imply in the consumption equation.

b. What is the associated saving functions? What do the intercept and slope mean?

c. Sketch the savings and the associated consumption function.

d. Compute the level of consumption if income Yd is GHS 200.