Macroeconomics Answers

15.10.18, 21:21
Given the following equations for a certain economy: Y = C + I + G + X (Income identity) C =100 +0.9Yd (Consumption function) I = 200 –500r (Investment function) X = 100 – 0.12Y –500r (Net export) G = 200 (Government purchases) T = 0.2 (Tax rate) L = Y-100r (Real money demand) M = 800 (Real money supply).
Derive equations for IS and LM curves . Determine the r and y pair at which the two markets are clearing iii) Compute the values of C, I, X and L

If there was an increase in personal incomes of the Nation this could result in

An increase in the GDP. Would you agree with this, yes or no and why?

Consider a single Solow economy that has reached its balanced growth path. Suppose that n++a=0.06 and that  =0.03. Suppose also that the production function is Cobb-Douglas with  equal to 1/3. Now suppose that the economy opens up to international capital flows and that capital flows into (out of) the economy if the international interest rate is lower (higher) than the interest rate in the economy. Suppose the international real interest rate is 0.04. Show that whether capital flows in or out of the economy depends on its savings rate.

Given that: depreciation = 90, indirect taxes = 70, subsidies = 30, payments to factors of production from abroad = 20, payments to foreign factors = 40.

Compute:

1) Gross national product (GNP) at market prices. (1 Mark)

2) Net national product (NNP) at market prices. (1 Mark)

3) Net national product (NNP) at factor cost. (1 Mark)

4) Net domestic product (NDP) at factor cost (1 Mark)

Assume the following balance sheet for Bank X. Assume all numbers are in millions of
dollars. The required reserve ratio is 20%
Assets Liabilities
Reserves 102 Deposits 300
Securities 68
Loans 130
a) What is the amount of required reserves?
b) What is the maximum amount that the bank can lend?
c) If the central bank decided to sell 25 million dollar worth of government securities to bank X,
how will this transaction affect the bank’s balance sheet? What is the balance of securities and
required reserves and excess reserves after this transaction happens?
d) Assume the deposits increase by 10 million dollars. How will this affect the balance sheet?
Will the reserves, securities and loans change?

1. Suppose in year 2014, the amount of money in circulation is $400 billion, the price level is
120 and the real output is $100 billion.
a) What is the velocity of money?
b) Suppose in year 2015, real output became $102 billion, and the Fed increased the stock of
money to $420 billion. What is the inflation rate from 2014 to 2015? (

5. Compare and contrast fiscal and monetary policies
Hint: Do the comparison in a table so it looks neat and organized. Elements to discuss include
(but not limited to) the objectives of each policy, the tools used, the implementing agencies,
limitations of each, etc.
6.
a) What is the quantity theory of money?
b) According to the theory, what would happen to prices and output if the Fed rapidly increases
the growth rate of money supply? Show on a graph. Explain both the short run and long run effects

3. Historically, shifts towards a more expansionary monetary policy have often been associated with increases in real output. (25 points)

a) Is this surprising? Why or why not?

b) Can an expansion in money supply increase real output and employment permanently? Why or why not?


4. Suppose you deposit $1000 scholarship check in the bank. If the required reserve ratio is 10%, explain the process through which the banking system will create new money. How much money can potentially be created by the entire banking system as a result of this deposit? (10 points)

2. Trace the impact of open market sales (restrictive monetary policy) on (1) the money market, (2) the loanable funds market and (3) the real economy in the short run (assuming that the economy starts at equilibrium in the goods and services market). How will the economy adjust to this shock in the long run (hint: I need you to trace the impact through three markets… so I am expecting 3 graphs for each of the three markets… For the G&S market talk about adjustment of factor costs)

1. Use the money demand and money supply model to show graphically and explain the effect on nominal interest rates of the Federal Reserve’s open market purchase of Treasury securities.