Economics Take Test Homework

QUESTION 1

10 points      

 

Content          H

Consider an economy, where the monetary base is 10 billion pesos. Banks keep 15% of deposits in reserve. Assume that 20% of the money supply is in currency and the rest is in deposits.

  1. Find the money

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QUESTION 2

5 points       

 

 

If reserves are scarce, how would the federal funds rate change (increase or decrease) if the Fed:

  • buys some mortgage-backed securities
  • sells some short-term Treasury securities
  • lowers the (minimum) reserve requirements

 

QUESTION 3

5 points       Save Answer

If reserves are superabundant, how would the federal funds rate change (increase or decrease) if the Fed:

  • decreases the interest rate it pays on banks’ reserves
  • increases the offering rate on overnight reverse repurchase agreements.

 

QUESTION 4

20 points       

 

 

The demand for  real  money  balances  is  given  by

, where M is the quantity of money, P is the

price level, Y is output, and i is the nominal interest rate which is measured in percent. At the beginning of the year, the nominal interest rate is 2%. Over the year, the monetary base increases by 2%, the money multiplier increases by 1%, the output increases by 2% percent, and the nominal interest rate DECREASES by 2 BASIS POINTS.

  • If the ex-ante real interest rate equals 0.5%, find the expected inflation rate at the beginning of the
  • Calculate the percentage change in the velocity of money (if any).
  • [In answering this question, you are allowed to use the approximations regarding the percentage

 

changes; see page 4 of the math review (slide set 3).] Calculate the actual inflation rate.

  • Is it true that purchasing power was transferred from borrowers to lenders?

 

QUESTION 5

20 points       

 

 

Assume that the labor force is 150 million people and there are 10 million discouraged workers who do not have a job but are not looking for one either. On average, it takes 2 months for an unemployed person to find a job. A job lasts for 30 months on average. Assume that the (official) unemployment rate is 10 percent at the beginning of April.

  • How much will the (official) unemployment rate be at the beginning of May?
  • Assume that at the beginning of May, the 10 million discouraged workers start looking for a How much will the unemployment rate be at the beginning of June?
  • If we wait long enough, the unemployment rate will converge to some Calculate this value.

 

QUESTION 6

20 points        Save Answer

 

[Solow Model] A closed economy has the following

Cobb-Douglas production function: where Y denotes output, K denotes capital, and L denotes labor. Capital is measured in machines and labor is measured in workers. There is neither population growth nor technological progress. The annual depreciation rate is 4%. The saving rate is 32%. There are 81 machines per worker at the beginning of the year.

  • How much is consumption per worker during the year?
  • How much is consumption per worker during the next year?
  • How much is consumption per worker in the steady-state?
  • Now assume that the economy is already in its steady state. By how many percentage points should the government change the saving rate so that the economy may converge to the golden rule steady-state (use a “+” for an increase and a “-” for a decrease)? How would the current generation feel about the change?

 

QUESTION 7

10 points       

 

 

Consider a stock market boom (exogenous increase in consumption and/or investment) in a closed economy. Assume that prices are fixed in the short run.

  • Will the interest rate increase in the short run?
  • Will income increase in the short run?
  • Will the price level increase in the transition from the short run to the long run (absent any policy response)? For future reference, denote the resulting long-run price level by P*.
  • Now, assume that there was a policy In particular, the central bank intervened in order to stabilize the interest rate in the short run.
    • Did it increase or decrease the money supply?
    • Will the long-run price level (following the central bank’s intervention) end up greater, smaller, or equal to P*.

 

QUESTION 8

10 points

 

 

Consider an exogenous decrease in real money demand (e.g., a substantial increase in credit card usage) in a closed economy. Assume that prices are fixed in the short run.

  • Will the interest rate increase in the short run?
  • Will income increase in the short run?
  • Will the price level increase in the transition from the short run to the long run (absent any policy response)?