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The demand for money function was MD = 4Y − 1000i where MD is the quantity of money demanded, i is the rate of interest (interest of 5 means 5 percent in this problem), and Y is real national income, which currently is 1500. The supply of money is 1000, currency in circulation outside the banking system is 100, the target reserve ratio is 10 percent, there is no cash drain in the banking system, and the recessionary gap is 250. The price level does not change
1. Suppose the Bank of Canada reduces the target for the overnight rate, prompting commercial banks to reduce the market rate of interest to 4 percent. Are the commercial banks experiencing a situation of excess cash reserves or of too little cash reserves? What is the size of this excess/insufficient cash reserve when Y = 1500?
2. What will the commercial banks do to eliminate excess/insufficient cash reserves? By how much should the level of cash reserves of the banking system change for the economy to move to full employment?
. If you are a business in Ontario, it is possible to get a grant of up to $30,000 or 50% of costs related to growing your export market. For example, attending international trade shows, or creating a marketing plan for a new market. This funding comes from an annually reviewed and funded program to support exporters. Do you think this is a fair or an unfair trading practice? Explain.
a closed economy has recently suffered on account of a global economic meltdown and its economy has been in a slump ever since. Many of its citizens have lost jobs and are unemployed now. The Government has decided to undertake more public work programs in order to revive the economy. However, there exist very deep divide with respect to the pursuance of this program in academia. While some of the economists feel that the exercise would be wasteful and inefficient, there are many others who completely support the policy decision of the government. discuss
The opportunity cost of holding monetary assets is
Suppose that, at any given level of disposable income, everyone in the economy decides to save more. What would be its effect on the level of savings, consumption and output, in equilibrium.
A country produces only bananas and coconuts. The base year is 2015, and the table below gives the quantities produced and prices.
Year
Bananas bunches
Coconuts bunches
Quantities produced
2015
1,000
500
Quantities produced
2016
1,100
525
Prices
2015
$2
$10
Prices
2016
$3
$8
- Calculate nominal GDP in 2015 and 2016:
- Calculate the RGDP 2016
Imagine the components of aggregate demand are:
Consumption £500 billion
Investment £100 billion
Government spending £200 billion
Import spending £150 billion
Total aggregate demand £900 billion
What is the value of export spending? Explain your answer.
Q#5. Explain why the sum of MPC and MPS equals to 1.
Consider an individual consumption function, which is the standard textbook consumption function, that is, has a y-intercept of autonomous consumption and is linear in the disposable income. Assume that the slope of this consumption function equals 0.7, and that the autonomous consumption equals $20 billion in the aggregate economy.
a. Write down the consumption function for this economy.
b. What is the marginal propensity to save (MPS) in this example?
c. Suppose there is an increase in real income of $500 billion in this economy. Given your consumption function, what is the change in consumption given this change in real income?
Q# 2. Suppose you have the following information about a closed economy: C = 50 + 0.80 Y I =150 G = 175 Where C is consumption, I is investment, G is Government expenditure and Y is income.
a. Find out the equilibrium level of income.
b. Suppose I increases to 210 what is the new equilibrium level of income?
c. What level of G is needed to achieve a target income of 4850?
. Total revenue from the sale of X is given by the equation R=60Q-Q2. Calculate the value of marginal revenue when the point price elasticity of demand when marginal revenue is -2.
