Macroeconomics Answers

Suppose the consolidated balance sheet of an economy’s banking system is shown in the following table:
Assets: Liabilities:
Currency 10 Deposits 2000
Deposits at the central bank 90
Government Bonds 300
Loans Outstanding 1800 Capital 200
Total 2200 Total 2200
In answering the following questions, assume that the banking system is initially in equilibrium and that
the public holds all of its money in the form of deposits in the banking system.
(a) What is the value of reserves in the banking system? What is the desired (target) reserve ratio of the commercial banks? What is the value of the money supply?

Suppose the investment demand and private saving supply curves in the market for loanable funds are
given by the following equations: I = 2000 – 100r S = 500 + 100r
where r represents the real interest rate in percentage points (eg. 10% is represented by 10), and
quantities are in billions. Assume that a closed economy and that initially the government is running a
balanced budget (ie. government saving initially equals 0).
(c) Return to the original supply and demand conditions. Suppose now that the government changes
policy and will run deficits equal to 500 to finance current government services. How does this
affect the level of national saving? Calculate the new equilibrium. What is the level of private
saving in the new equilibrium?
(d) With reference to an aggregate production function, explain why the deficit described above might
affect future economic growth.

Suppose the investment demand and private saving supply curves in the market for loanable funds are given by the following equations: I = 2000 – 100r S = 500 + 100r
where r represents the real interest rate in percentage points (eg. 10% is represented by 10), and
quantities are in billions. Assume that a closed economy and that initially the government is running a
balanced budget (ie. government saving initially equals 0).
(a) What is the equation for national saving? Calculate the equilibrium interest rate, aggregate level of
investment in the economy, and the aggregate level of national saving. Illustrate in a diagram.
(b) Suppose that firms revise downward their expectations of the future cash flows from investment
projects and the result is that demand is decreased by 200 at any interest rate. What is the new
demand equation? Calculate the new equilibrium. Illustrate in your diagram.
(even if you dont do the diagrams could you at least tell me how i can go about doin it :D)

For each of the following events, describe the effects on the Canadian economy assuming that it is originally in long run equilibrium. For each, explain the short and long run effects in the context of an aggregate supply and aggregate demand diagram and any adjustment from short to long run equilibrium.
(a) As a result of a correction in Canadian housing prices, domestic consumption spending falls.
(b) The Bank of Canada pursues an expansionary monetary policy.
(c) The discovery of a cheap “cold fusion” technology reduces other energy prices [Hint: Canada is an
exporter of traditional energy products.]

State True, False or Uncertain. When an economy goes into recession, a central bank that is interested in targeting inflation should pursue an expansionary monetary policy

State True, False or Uncertain. A central bank trying to increase interest rates can do so without decreasing the money supply

State True, False or Uncertain. An economy that is open to capital flows has two channels for the monetary transmission mechanism, while an economy closed to capital flows has only one. [Hint: Explain in the context of an increase in interest rates in both types of economies.]

State True, False or Uncertain. The increased availability of credit cards has resulted in an increase in the money supply.

State True, False or Uncertain. Because it is no longer backed by the potential for conversion to gold, modern Canadian fiat currency is no longer able to serve as a form of money.

State True, False or Uncertain. Neoclassical growth theory tells us that the widespread adoption of new technologies will increase potential GDP and potential GDP per worker.