econ pack

Review Questions: The Great Depression

1.

2. What does Norm Miller consider to be the "fundamental principle of Macroeconomics"? Explain this is detail. /

3. What happens to GDP if some saving is not borrowed and spent? Why?

4. What happened from 1929-32 and then fro

a. GDP b. Unemployment: officially & actual

a 1 day in Oct '29 c. from 1929-'32 d. 1929-1951

@ How did the events in #5 contri u e to the Great Depression?

7a. What happened to thousands ofbanks between 1929-'32? b. What caused the events in (a)? c. How could the Federal Reserve have prevented the events in (a)? d. What was the reason that the Fed did not save the banks? e. What did the Fed do in 2008 and 2009?

8. Why did the events in 7a contribute to the Great Depression?

9. Explain two ways that Grandma Kovalesky helped to cause the Great Depression?

10. Use micro-economic reasoning to explain why economists once believed that a Great Depression could never occur if all firms cut prices enough and all workers took huge cuts in their nominal wage rates.

11 . Why do economists now believe that deflation can cause a Great Depression? What happened to prices in the USA in 2009?

@at caused the Great Depression to end?

ECO 202 I - Spring 2012

202 Review Questions: Cbapter 6

Ia. What is "real GDP"? b. What is the difference between potential GDP and actual GDP?

2. How is a country's ave. standard of living, S of L, measured? Write equations that relate: a. the% ~(S ofL) to% ~GDP and% changes in population, pop; b. the S ofL to (labor productivity) and (the ratio oflabor force to pop. Upop); c. the %~(S ofL) to(% change in labor productivity) & (%change in the Upop ratio)

3. What, typically, is the most important reason why a country's S ofL increases over time?

4. What is the Rule of72? (Note: The book calls it the Rule of70, but I want you to use 72.)

5. What was true about the rate of economic growth in the USA from: a WWII - 1970; b. 1970 - early I980s; c. the mid 1980s- 2000 d. the 2I 51 century?

6. What is the primary cost of economic growth? Explain this with regard to an economy, and then relate your answer to your family's experiences with regard to your education.

7. a. How is the unemployment rate calculated? What is its ave value in the US since WWII & since the mid-I980s? b. Why will the unemployment rate always be greater than zero? c. What is the highest value for the U% in USA history? When? d. How, in general, does the Urate in Japan and Europe compare with the Urate in the USA?

8. Explain via the use of graphs and equations how a country's potential output, Yp, is determined. Proceed as follows:

a. How is the quantity oflabor hired determined? (Draw the graph and explain.) b. How is the country's potential output, Yp, determined if we know the equilibrium

quantity of labor? (Write a production function and draw the graph.)

9. What increases a country's potential output? Be thorough!

I 0. What is true about economic growth trends over the last 4 5 or 50 years for: a. the richest countries b. the poorest countries c. the 4 Asian Tigers plus China

II. Use your answers to #I 0 to answer the following: "Is Convergence Theory supported by historical evidence?"

12a What has been the primary cause of sustained increases in the S of L for all counties? b . What is the most important cause of econ growth in affluent countries? c. What is the most important cause of econ growth in poor countries?

13a. Since WWII, what has caused the US Standard of Living to increase via higher values for the L!Pop ratio? b .. Explain why immigration (or an increase in the% of women who work) can increase a country's Stand of Living even though it seems as though each job taken by an immigrant or woman simply displaces an American and/or male worker.

I4. Explain each of the following 3 theories of economic growth. a. the Classical (Malthusian) Theory, including modem versions of it b. the Neo-Classical Theory, especially how it differs from (a). c. New Growth Theory, especially how it differs from (b)

2 ECO 202 I- Spring 2012

202 Chapter 6 Problems

I. If output per person increases by 5% between 1990 and 2000 while labor productivity increased by 4%, then what happened to this country's ratio of workers to population?

2. What happened to a country's average standard of living if the ratio of workers to population increased by 2% over a time interval when average labor productivity went up by 4%?

3. A country has 100 people and 60 of them are working. Each worker produces $10,000 worth of output per year. What is the average standard of living in this country?

4. Real GDP in a country increases every year by 6% and its population grows by 4% per year. a. What happens to its ave standard ofliving each year? b. How long will it take for its output to double? c. How long will it take for its standard of living to double? d. If its real GDP is I 000 this year, then what will be its value in 24 years?

5. A country has 1000 people who want to work but only 800 of them have a.job. What is the number of people unemployed? What is the % unemployment rate?

6. Prices in a country were P = 1 00 at end of 2000; P = 110 at end of 2001; P = 115 at end of 2002; and P = 112 at end of2003. What was the inflation rate from: (a) 2000-2001 (b) 2001-2002 (c) 2002-2003.

7a. Explain how there can be disinflation even though prices are rising. b. In which year in #6 did the economy experience disinflation?

8. In which year in #6 did the economy experience deflation?

9. Potential output in an economy has increased by 1 00 every year for many decades. In the year 2000 the value for potential output was 1000, and current output was 1000. Then for some unknown reason potential output began to grow more slowly, i.e., by 50 every year. Also, actual output grows only by 40 every year. What are the values for the Okun Gap in:

a.2001 b.2002 c.2003

10. What is the value for the average product of labor and the standard of living in a country that has the following data: population = I 00; labor force= 80; output = $16,000?

1 L 44% of the population in a country is working and each worker can produce $9,000 worth of output. What is the value for output per person?

I2. Labor productivity in a country is growing at a rate of 3% each year, while the labor force (as a percent of the population) is declining each year by 0.5%. What is happening to the average standard ofliving in this country?

13. GDP per person in the USA has been growing about 2% per year for more than a century. When the baby boom generation retires, economists fear that the% of the population who work will decline each year. In order for standards of living to grow at the usual rate, how fast will labor productivity have to grow if(Lipop) declines annually by: (a) 1%

(b)2% (c) 3%

14. If GDP in China is growing at 9% each year, and if the population is growing at 1% per year (while the % of the population who work remains unchanged), then how fast is labor productivity increasing (in% terms) in China?

15. Approximately how long will it take the standard of living in China to double in #5? What will happen to their standard of living over the next I 8 years? How about over the next 27 years?

16. How long will it take GDP in China to double in #14?


17a. Let w represent the real wage rate, W/P. Labor demand is given by w = 40- 2Ld, and labor supply is w = 4 + 2Ls. What are the equilibrium values for the real wage rate and quantity of labor?

b. If the aggregate production function is: y = l 0 L 5K 5 and the capital stock is 64, then what is the value for potential output?

18a. Assume that the economy in #17 experiences an advance in technology such that the aggregate production function becomes y = 15 L5 K 5

. This prompts firms to increase the capital stock to 81 and to demand labor via the equation: w = 68 - 2Ld. What is the new equilibrium quantity of labor and real wage rate?

b. What is the new value for potential output?

19a. Now assume that a plague kills many workers in #18 such that labor supply decreases to: w = 52 + 2Ld. If the capital stock remains at 81 , then what are the new values for the equilibrium quantity of labor and real wage rate?

20. Use Solow's "one-third rule" to calculate the% increase in labor productivity that occurs if the KIL ratio rises from 100 to 106.

1. +.05 = + .04 +X gives X= +.01 or + I% 2. o/o,1(y/pop) = +.04 + .02 = + .06 or +6% 3. y/pop = $10,000 x .60 = $6,000 4a. +2% b. 12 yrs c. 36 yrs d. 4,000 5. 200 and 20% 6a. +10% b. +4.55% c. -2.61%

Answers

7a. lfP rises more slowly than the inflation rate has fallen even though prices are increasing; this is called disinflation. 8.2003 9. 2000 2001 2002 2003

a. Value for Yp if it increases by 50/yr b. Actual value for Output

Okun Gap = a - b

1,000 1,000

zero

10. APL = 16,000/80 = 200; output per person= 16,000/100 = 160 11. Y/pop = 9,000 x .44 = $3,960 12. Ave standard of living is growing by: 3%- .5% = 2.5% per year 13a. 2%+ 1%=3% b. 2%+2%=4% c.2% + 3%=5%

1,050 1,040

10

14. First find: %,1(GPD/pop) = o/o,1GDP- %,1pop = 9%- 1% = 8%. Then solve 8% = X + 0% to get X = 8% = growth rate in the APL.

1,100 1,080

20

1,150 1,120

30

15. Use the rule of72 to get: 72/8 = 9 years; In 18 yrs. the standard ofliving will increase 4-fold, and in 27 years it will increase 8-fold. 16. Use the rule of72 to get 72/9 = 8 years. 17a.L=9,w=22; b.Yp=240 18a. L = 16,w = 36 b. Yp = 540 19a. L = 4, w=60 b.Yp=270 20. (1/3) X 6% = 2%

4 ECO 202 I -Spring 2012

202 Chapter 5 Review Questions

1. Define and/or explain: working age population; the labor force; unemployed (give 3 conditions); not in the labor force; how the U% is measured; LFPR ==Labor Force Participation Rate; discouraged workers; Okuns' s Law and the equation for it; the CPI vs the GDP Deflator

2. Explain what is meant by: frictional U, cyclical U, and structural U.

3a. What are three reasons why a person might be frictionally unemployed? (b) How do these differ from the reason(s) for cyclical unemployment and for structural unemployment?

4a. Why can U never be zero? b. Why would we not want U to be zero? c. Why might the U% rise during a cyclical upswing even though hundreds of thousands of workers are being

hired?

5. What is the precise definition of"potential output", Yp? (Be sure to tell me what is true wrt: a. the U rate when output equals Yp; b. the capacity utilization rate, CUR, when output equals Yp.

6. What is meant by ''the natural rate of unemployment", or Un? a. what is the relationship between "potential output" and Un? b. what is true about actual output, Y, vs potential output, Yp when U = Un? c. what is true about Y vs Yp when U > Un? d. what is true about Yvs Yp when U , Un?

7. Explain how a. output can sometimes exceed a country's potential output; b. actual U can be less than Un

8. Answer the following wrt the CPl. a. what does it measure? b. how often is it calculated? c. what is meant by ''the reference base period" and when is this? d. what important used goods are included in the CPI? e. how does the CPI differ from the GDP deflator?

9a Explain in words and write the formula for how the level for the CPI is calculated. b. What are two ways to calculate the % change in the CPI?

10. Explain the biases that exist in calculating the CPl.

11. Approximately how much does the CPI bias the official inflation rate? Why don' t we fix this problem?

12. What is the GDP Deflator and how does it differ from the CPI? How is the GDP Deflator calculated, i.e., give the formula?

5 EGO 202 I- Spring 2012

202 Cbapte~blems 1. The population of a country is 1000, the labor force is 800, 700 people are working, and 100 people have no interest in a job, but the rest of those who are not in the labor force wish they had a job but have given up looking. What are the values for:

a. LFPR b. the# who are U'd c. U% d.# of discouraged workers

2. A country has I 00 workers in the labor force and 90 are working; 2 just quit their jobs, I was just fired, and I recently entered the labor mkt; also, 2 have been unemployed for 5 years because they have no marketable skills. What is:

a. the percentage value for frictional U c. the value for Un b. the percentage value for cyclical U d. the value for the Okun Gap

3. Assume that the following facts are true for an economy. Use these data to answer the questions below. total population = 2,400 population under 16 years old = 400 labor force= I200 employed = 1000 unemployed=? population 16 & over not in labor force=?

a what are the number of people unemployed and the unemployment rate? b. what is the labor force participation rate? c. if half of those who are 16 & over and not in the labor force have lost their jobs and have given

up looking for a job, then what percent of the labor force are these discouraged workers?

4. Answer each part of #3 if all the data in #3 are the same except that the population under 16 years old is now only 200 instead of 400.

5. Use Okun's Law to calculate the GDP gap (Okun's gap) if actual U = 10%, and Un = 6%. If actual GDP is 100, then what is the value for potential output?

6. Answer #5 if actual U = 7% and Un = 4% and actual GDP = I 000.

7. If potential output is 10,000, actual output is 8,000, and Un = 4%, then what is the actual unemployment rate according to Okun's Law?

8. Answer #7 if actual output is 9,000 and Un = 5%.

9. People in a country spend 40% of their income on housing, 20% on food, 25% on transportation, and 15% on entertainment What was the inflation rate for the CPI last year if housing costs went up 10%, food prices increased 12%, it cost 40% more for transportation, and entertainment became 100% more expensive?

10. A country produces on1y 2 consumer goods, X andY. In the weight year people consumed lOX and 20Y. In the base year Px = $20 and Py = $5. Currently, Px = $22 and Py = $10.

a. What is the value for the CPI currently? b. How much inflation, cumulatively, haw there been since the base year?

11. A country produces 3 goods, X, Y, and z. This year is produced 10 of each good. In the base year it produced 8 of each good. The base year prices were: Px = 5; Py = I 0; and Pz = 20. This year's prices are: Px = I 0; Py = 15; Pz=22.

a. What is the value for this year's GDP Deflator? b. How much inflation has there been, cumulatively, since the base year?

Answers Ia. 0.8 b. 100 c. 12.5% d. 100 2a. 4% b. 4% c. 6% d. +.08

3a. U = 1200- 1000 = 200, & Urate= 200/1200 c. pop 16 & over not in labor force= X,


b. LFPR = 1200/2000 • ... _ hen 1200 = 2400- 400- X · -~ = _800 & discouraged = 400 and ~ dtscouraged = 400/1200

4a.U = 200 & Urate= 200/1200 b. LFPR = 1200/2200

5. GDP gap= +.08 and Yp = 108.7

6. GDP gap = +.06 and Yp = 1063.8

7. (10,000- 8,000)/8,000 = 2.(U- .04): gives U = .14

c. X = I 000, discourage = 500, ( discouraged/LF) = 500/1200

8. U=.IO

9. infla rate= (.40 X .10) + (.20 X .10) + (.25 X .40) + (.15 X l.O) = .04 + .02 + .10 + .15 = .31

lOa. CPI = 100 x[(22xl0) + (10 x 20)] I [20xl0) + 5x20)] = 100 x [420/300] = 140 b. 40%

11a. GDP Deflator= 100 x [(10x10) + (15xl0) + (22x10)]/[5xl0) + (10x10) + (20x10)] = 100x[470/350] = 134.3 b.34.3%


202 Chapter 4 R~iew Questions

la Carefully define GDP; b. what is the difference between GDP and GNP? c. what is the difference between nominal and real GDP? d. explain the two approaches for calculating GDP e. what is the relationship between gross domestic investment, cepreciation, and net investment. f. what does net investment measure?

2. What is National Income, and how does it differ from GDP?

3. Draw a Circular Flow Diagram; use it to explain the two approaches for calculating GDP.

4. Explain how the govt defines: consumption; investment; government spending; net exports.

5. What are the 3 ways that investment is financed?

6. Explain the difference between stock concepts and flow concepts; give several examples of each. Then use these concepts to explain the relationship between:

a. saving and wealth b. net investment and the capital stock.

7. What is the difference between nominal GDP and real GDP? If you know the output and the price of each good this year and the prices of each good in a base year, then how do you calculate:

a. this year's nominal GDP b. this year's real GDP, ... using the old method

8. What is the GDP Deflator? How is it calculated?

9. Explain the chain weighted method for calculating real GDP; be sure to include an account of: a. how last year's prices are used to calculate the% change in real GDP; b. how this year's prices are used to calculate the% change in real GDP again; c. how (a) and (b) are used to calculate the "chain weighted"% change in real GDP; d. bow (c) is used to calculated the current value for real GDP.

10. Why does real GDP not measure happiness?

11. Explain why the govt's official measure ofGDP is biased by: a. illegal activities b. legal underground activities c. household production


Econ 202 Chapter 4 Problems

1. Calculate GOP in each case below, if GNP is 5,000 and if: a. US output abroad = 200 & F gn. output in US = 600 b. US output abroad= 900 & Fgn output in US= 500 c. Americans earn 1200 abroad & foreigners earn 600 in the US

2. If GOP is 2000 when GNP is 1800 and US output abroad is l 00, then how much did foreigners produce in the US?

3. Use the data below to calculate the values for net exports, NX, GOP, net investment, and National Income.

consumption = 800 government purchases = 300 indirect business taxes = 200 imports= 250

gross domestic investment = 200 government transfer payments = 100 depreciation = 1 00 exports = 1 00

4. Assume that in the country in #3, wages & salaries =500; rental income= 50; & net interest earnings = 1 00. What was the value for profits in that country in that year?

5. Now assume that a country has wages & salaries = 900; rental income = 100; net interest income = 200; & profits= 300. What is the value for National Income, NI, in this country? What is the value for GOP if: indirect business taxes, IBT =200 and depreciation = 400?

6. A country's capital stock, K, is 10,000 at the end of December 2000; gross investment in 2001 is 600. What is the value forK at the end of December 2001 if depreciation in 2001 was:

a.200 b. 100 c.800

7. Nominal GOP is 8,000 when real GOP is 6,000. What is the value for the GOP deflator? How much have prices risen since the base year?

8. If nominal GOP is 5000 when the GOP deflator is 120, then what is the value for real GOP?

9. A country produces only two goods, X and Y; the output of each good last year and this year is given below. Also, the prices of each good in each year are given. If Px = 10 and Py = 6 in the base year, then what is the value for nominal GOP this year?

Last Year This Year

OutputofX 50 60 OutputofY 20 40 Px 15 20 Py 10 15

I 0. Using the old method, calculate the value for real GDP this year and the percentage increase in real GDP from last year to this year.

11. Use your answers to 9 and 1 0 to calculate the value for the GDP deflator this year. How much inflation has there been (cumulatively)since the base year?


12. Use the chain-weighted method and the infonnation in #9 to calculate the percent increase in real GDP this year.

Answers

la. GDP = 5,000-200 + 600 = 5,400 b. GDP == 5,000- 900 + 500 = 4,600 c. GDP == 5,000 - 1200 + 600 = 4,400

2. 2,000 = 1800-100 +X} X= 300

3a. NX = 100-250 = -150 b. GNP= 800 + 200 + 300 - 150 == 1150 c. net I = 200 - 100 = 100 d. NI = 1050 - 200 = 850

4. NI = 850 = 500 +50+ 100 +X} X = 200

5. NI = 900 + 100 + 200 + 300 = 1500 GNP = 1700 + 400 = 2100

6a 10,400 b. 10,500 c. 9,800

7. GDP deflator= (8,000/6,000) x 100 == 133, and, thus, prices have risen 33%

8. real GDP = (5,000/120) x 100 = 4167

9. 1 ,800 = 20 X 60 + 15 X 40

10. 840 this year and 620 last year;% increase= (840- 620)/620 == 35.5%

11. GDP Deflator= 214.3; cumulative inflation since base year is 114.3%

12. Using Current Prices,% &eal GDP = (1800 - 1300)/1300 = 38.5% Using Last Year's Prices,% &eal GDP = (1300- 950)/950 = 36.8% Thus, the ave chain-weighted increase in real GDP is 37.65%

13. USA has $200/person for its aveS ofL a. China has $l/person; thus, the US is 200 times greater b. China has $.50/person; thus, the US is 400 times greater c. China has $.40/person (you must invert the exch rate to get$ per yuan); US is 500

times greater


Chapter 7 Review Questions

1. What is the difference between a stock concept and a flow concept? Which type of concept are each of the following? Wealth, saving, the capital stock, investment, GDP, your checking acct balance?

2. What are financial intermediaries? What function do they perform? What are several examples?

3. How is investment financed?

4. What is the difference between a nominal interest rate and a real interest rate? Which rate should guide the activities of rational people?

5. Who supplies "loanable funds", SLF, and who demands "loanable funds", DLF?

6. Explain logically what happens to the real r if:

a. SLF<DLF b.SLF>DLF

7a. What happens to the D for LF as the real r falls? Why? b. What happens to the S ofLF as the real r falls? Why?

8. How will the S of LF curve shift if: a. Incomes fall b. people become afraid of a recession c. people become more frugal

9. How will the D for LF curve shift if: a. firms expect a recession b. firms develop new more efficient production techniques

10. What will happen to the equilibrium real r if each ofthe events in 8 and 9 occur, ... one at a time?

11. What is meant by "financial disintermediation"? What happens to Investment if this occurs? When bas it occurred in the USA?

12. What is meant by a "credit crunch"? Why is this an example of#ll? What did the gov do in 2008 and 2009 to prevent #11 from being too severe?

11 ECO 202 I - Spring 2012

Chapter 7 Problems

1. What is the value for the real interest rate, r, if the nominal interest rate, i, is 7%, and if the inflation rate is: (a) 3% (b) 6% (c) 10%

2. What is the common sense meaning of the negative value for r in 4c?

3. What is the value for the nominal interest rate if the real rate is 8% and the inflation rate is: (a) 3% (b) 6% (c) 10%

4. What is the inflation rate in a country ifi = 6% and r = (a)O (b)-2% (c)+1%

5. Draw a graph of the demand for loanable funds, LF. Which way does this curve shift (&why does it shift) if:

a. firms expect a recession b. an advance in tech occurs c. a terrorist attack occurs

6. Use the graph for the demand and supply of LF to show what happens to the equilibrium value for r if: (a) the govt budget goes from zero to a deficit

(b) the govt budget goes from zero to a surplus (c) the home country borrows more funds internationally (d) the home country used to borrow but now it begins to lend funds internationally

7. What is the common sense of your answers to #6?

8. Suppose that private saving is given by Sv = 20 + 1 Or and investment is given by I = 100 - 1 Or. If the govt budget is balanced and if net KF = 0, then what are the equilibrium values for r and I?

9. Do #8 if everything in #8 is the same except that now I= 50 -lOr. What is the common sense explanation for what happens to r?

10. Private saving is: Sv = 50+ 1 Or and investment is I= 200 - 1 Or. The govt has a budget deficit of 30 and the country has a net borrowing from abroad of20. What are the equilibrium values for rand I?

11. Do # 1 0 if everything is the same except that the country is a net lender internationally by -20. Why has r changed from 1 0?

12. Do # 1 0 again if everything in # 13 is the same except that the net international borrowing is given by the equation KF = 30r.


Answers

la 4% b.l% c. -3% 2. r < 0 means that you get penalized for saving

3a 11% b. 6% c. 10% 4a. 6% b. 8% c. 5%

5. The D for LF curve shifts left in (a) and (c); firms will invest less because they expect a lower profit rate under such circumstances; it shifts right in (b) because an advance in tech usually lowers production costs, which, in turn, increases the profit rate; this induces firms to invest more.

6 & 7. In (a) and (d) the value for r rises because the S ofLF curve shifts left; a govt budget deficit requires the govt to borrow some of the private saving, thereby reducing the amount of funds available for firms to borrow. Similarly, if some private saving is lent abroad, then this reduces the supply ofloanable funds available for domestic firms to borrow.

In (b) and (c) the value for r falls because the S of LF curve shifts right; a govt budget surplus means that the govt is saving money and this can be borrowed by firms; this is also true for an increase in the net capital flow.

8. r = 4 and I = 60

IO.r=8andi=l20

12. r = 3.6 and I= 164.

9. r = 1.5 and I= 35; r falls because the new I equation means that firms what to invest (and borrow) less.

11. r = 10 and I= 100; funds flow out of the home country now, which means that fewer funds are available for firms to borrow.


radon

Sticky Note

b: 14% c: 18%


la What are the 3 functions of money? b. What are the components ofMl and M2?

2. In what way are banks financial intermediaries?

3. What are the 3 main functions of the Fed? a how many Fed Res District Banks are there? In which district are we? b. who is ultimately in charge of the Fed? How many members are there and what is true

about their terms of service? Who is the Chairman of the Fed? c. What does the Open Mkt Comm do?

4. What are the 3 main tools of the Fed? How does each one affect the money supply, Mo?

5. What is the difference between the actual rr and the required rr?

6. Explain how the banking system creates money.

7. Write the money supply equation given in my lecture. Then use it to explain what happens to the money supply if:

a. the Fed increases the rrr b. people want to have more cash and less money in checking accts c. banks are afraid to make loans and this creates excess reserves d. the Fed buys bonds in the open mkt; the Fed sells bonds e. the Fed decreases the Discount Rate; the Fed increases the Discount Rate

8. Defme and/or explain: the money multiplier; the federal funds rate; the discount rate; the equation of exchange; the nominal money supply vs the real money supply.

9. Draw a graph of MD and MS, having the nominal money supply on the horizontal axis. Use this to determine what happens to the equilibrium nominal int. rate, i, if:

a. Mo rises b. Mo falls c. P rises d. P falls e. Y rises f. Y falls

10. What must the Fed do to Mo (and what open mk:t activity is needed) if it wants to keep i constant (at some value for the federal funds rate) if: a. P rises b. Y falls

11. Makeup and write an equation for MD in nominal terms; draw the MD graph; explain why it has a negative slope; what happens to the MD curve if P increases?

12. Write the equation of exchange: a. using the levels of all variable b. using the % change in each variable

13. Why does the equation of exchange tell us nothing about the cause of inflation? Why is the equation of exchange (in either form) useful when discussing inflation?



1. What is the value forM 1 and for M2 for an economy that has the following data?

Coins & currency in Circulation= 300 Cash in Bank Vaults = 1 00 Demand Deposits = 1200 Travelers' Checks= 50

Bank reserves with the Fed= 900 MMMFs= 150 Saving Acct Balances= 1500 Time Deposits = 2000

2. What happens to the value for M 1 and to M2 in # 1 if people take $100 out of their checking accounts and place the funds in 1 year CDs?

3. Answer #1 if all data are the same, except that Travelers' Checks go up to 100. And Demand Deposits rise to 1500.

4. What is the value for the money supply and what% of this is Demand Deposits in a country that has the following data? (Note: Banks have no excess reserves.)

Cash in Vaults = 1 00 Required reserve ratio= .10

Banks reserves with the Fed = 600 currency in circulation = 200 5. Answer #4 if banks have excess reserves equal to 15% of deposits.

6. What is the new value for the money supply in #4 if the Fed reduces the required reserve ratio to 5%? (Note: All other data in #4 are unchanged.)

7. What is the new value for the money supply in #4 if every thing in #4 is unchanged except that people decide to hold 250 in currency instead of 200?

8. What is the price level in a country that has a money supply of200, real GDP of 1000, and where the velocity of money, V, is 10?

9a. What is the value for the nominal money supply in a country that has a price level of 100, a real GDP of 50, and a velocity of 5? (b) what is the value for the real money supply?

1 Oa. The nominal GDP is 2000 in the USA, and it takes each dollar 3 months to make one complete circular flow. What is the value for the nominal money supply? (b) What is the value for the real money supply if real GDP is 200?

11. What is the inflation rate in a country that has: a monetary growth rate of 5%; a constant velocity of money equal to 4; and a real economic growth rate of 4%?

12. A country's nominal money supply grows from 100 to 110 in a year when the velocity of money goes from 5 to 6 and the price index changed from 100 to 150. What happened to this country's real GDP? (Give the change in% terms.)


radon

Sticky Note

omit #7

radon

Sticky Note

cr=.10

Answers to Some RQ#8 and to All Problems

Review Questions

7a. M falls b. M falls, because currency rises by Dcurrency, but checking acct balances fall by the amount (1/rr) Acurrency; c. M falls because actual rr increases; d. M up when Fed buys bonds because this increase bk reserves; M down when Fed sells bond because this decreases bk reserves; e. when the discount rate falls, bks borrow more; this increases bk reserves and M goes up; M falls when the discount rate is increased

9a. i falls b. i rises c. i rises d. i falls e. i rises f. i falls

lOa. must raise M by buying gov bonds b. just the opposite of (a)

Problems

1. M1 = 300 + 1200 + SO = 1SSO; M2 = 1SSO + 1SOO + 2000 + 1SO = S200

2. Ml decreases by 100, and M2 is unchanged because a CD is a time deposit.

3. Ml = 300 + lSOO + 100 = 1900 M2 = 1900 + 36SO = ssso

4. M = 200 + (1/.10)~(600 + 100) = 200 + 10 x 700 = 7,200; DD/M = 70172 beause DD are equal to M minus currency in circulation.

S. M = 200 + (1/.2S) x 700 = 3,000; DD/M = 28/30

6. M = 200 + (1/.0S) X (700) = 200 + 20 X 700 = 14,200

7. M = 2SO + (1/.10) x 6SO = 250 + 6SOO = 67SO; note: the extra 50 of currency in circulation means that vault cash decreases by SO.

8. P = MV/y = (200 x 10)/1000 = 2

9a. M = PYN = (100 x S0)/5 = 1000; (b) MIP = 10001100 = 10

lOa. M = PyN = 2000/4 = SOO; (b) MIP = S00/10 =SO, because P = Py/y = 2000/200 = 10

11 .. OS+ 0- .04 = .01; Note: ifV is constant, then % AV = 0.

12 .. 10 + .20 - .so = -.20


radon

Sticky Note

omit #7

radon

Sticky Note

corrected answer: M=((1+.1)/(.1+.1))X900=4,950 will have this on exam

radon

Sticky Note

corrected answer: M=((1+.1)/(.1+.05+.1))X900=3,960

radon

Sticky Note

corrected answer: M=((1+.1)/(.05+.1))X900=7,260

202 Chapter 1 0 Review Questions

1. Define and/or explain: LRAS curve, SRAS curve, AD and its components, fiscal policy, monetary policy, the wealth effect, inflationary gap, recessionary gap, the natural rate hypothesis, NRH, Keynes' Law, Okun's Law

2. Answer the following wrt the LRAS curve and potential output, Yp. a what is true about profits when output equals Yp? b. what is true about U when output equals Yp? c. what is true about the real wage rate at each point on the LRAS curve? d. what assumption is needed for your answer to c to be true? e. give a common sense explanation as to why the LRAS curve is vertical. f. how, typically, does the LRAS curve shift over time? What makes it shift?

3. Answer the following wrt the SRAS curve. a. what assumption is implicit wrt the nominal wage rate, W, as we move along the SRAS? b. what is true about the real wage rate, w or WIP, as we move along the SRAS curve? c. give a common sense explanation as to why the SRAS curve has a positive slope. d. what makes the SRAS curve shift?

4. Answer the following wrt the Aggregate Demand curve, AD. a. what are the components of AD? b. how does a wealth effect help to give the AD curve a negative slope? c. how does a substitution effect help to give the AD curve a negative slope?

5. Explain how and why the AD curve shifts ifthere is: a expansionary monetary policy; (how about contractionary or tight monetary policy?) b. expansionary fiscal policy; (how about contractionary or tight fiscal policy?) c. firms becomes pessimistic about the future state of the economy (how about optimistic?) d. consumers believe that a recession will occur soon e. a terrorist attack makes people afraid to go out of their homes

6. Use the AD and AS curves diagram to illustrate and explain what determines the equilibrium value for output a. in the short run b. in the long run

7. Explain how the economy moves from a short run equilibrium to a long run equilibrium by proceeding as follows. a. start with AD= Yp on the LRAS curve; then assume that AD increases b. explain what happens to output, U, and P when the new SR equi is attained c. now, most importantly, what happens to move the economy back to its LRAS curve! Be

sure to explain what happens to W, y, U, and P as the economy moves back toward its LRAS curve withy= Yp.

d. why is your answer to c called the natural rate hypothesis?

8a. What does empirical evidence conclude with regard to the slope of the LRAS curve and the validity ofthe NRH? b. what is the Keynesian critique of the evidence in (a)?



1. Assume that a country's potential output is Yp = 1000, and its natural rate of unemployment is 5%. Its AD curve is given by the equation AD= 2000- 20P, and its SRAS curve is given by y = + 20P. Initially, the economy is in long run equilibrium.

a what is the value for output and for the price level initially? b. what is the value for the unemployment rate initialll? c. if the aggregate production function is: y = 1 OL5K and the capital stock is 100, then

what is the level of employment when y = Yp?

2. Now assume that the economy in #1 experiences an increase in AD such that the new equation for AD is given by AD = 2200 - 20P. Initially the SRAS curve and equation remain the same as in # 1.

a what is the value for the price level when the economy is in its new SR equilibrium? b. what is the value for output in the new SR equilibrium? c. what is the value for the output gap in (b)? [give this in % terms] d. what is the U% when it is in its new SR equilibrium?

3. Now assume that the economy in #1 and #2 moves gradually to a new LR equilibrium on its LRAS curve.

a. What is the price level at this new LR equilibrium position? b. what is the value for output at this new LR equilibrium position? c. what is the value for the U% at this new LR equilibrium position? d. what is the equation for the SRAS curve when the economy is at this new LR equilibrium

position? [HINTS: what happens to the SRAS curve as the economy moves toward its new LR equilibrium point?; the constant term was zero in the initial SRAS equation given in #1; what happens to the constant term when the SRAS curve shifts in the direction that you just stated? (note: the constant term in this equation is the horizontal intercept of the SRAS curve.); now solve for this new constant term.]

4. Answer each part of#l if potential output is Yp = 2000, Un = 6%; AD= 5000- SOP; and the initial SRAS curve is given by: y = -1000 + 1 OOP. Also, the capital stock is 400 and the aggregate production function is y = 2L5K 5

•

5. Answer each part of#2 if the economy is the same as in #4 except that AD decreases, with its new equation being: AD= 4,000 -lOOP.

6. Answer each part of#3 if the economy is the same as in #4.


202 Answers to Ch.lO Problems

1a. Y = Yp = 1000; solve Yp =AD and get P =50 b. Use the fact thqt U = Un if Y = Yp; thus, UI = 5% c. Solve the aggregate production function for L as follows:

i. 1,000 = lOL 112(100) 112 = (lOxlO)L 112 = lOOL 112

ii. 10 = 1,000/100 = L112

iii. L = 102 = 100

2a. Solve 20P = 220- 20P for P = 54 b. Y = 20P = 1080 c. (Yp- Y)/Yp = (1,000 -1080)/1000 = -.08

3a. Solve 1,000 = 200 - 20P for P = 60 b. Y = Yp = 1000 c. U=Un=S% d. Let X = constant term in SRAS equation. In the new LR equilibrium we have Yp =X+ 20P, or 1,000 =X+ 20x60; this gives X= -200. Therefore, SRAS is given by the equation Y = -200 + 20P.

4a. Y = 2000; P = 30 b. U=6% c. Solve: 2,000 = 2L112 (400) 112, and get L = 2,500.

Sa. P = 25 if: -1000 +lOOP= 4,000 -lOOP b. y = 1500 c. (Yp- Y)/Yp = (2000 -1500)/2000 = +0.25 d. 0.25 = 2[U- .06], which gives U = 18.5%

6a. P =20 b. y =2000 c. U=6% d. Y = 0 +lOOP, because this gives Y = 2000 = Yp when P = 20.



!.Define and/or explain: the MPC, the MPS, autonomous expenditure, Ao, the consumption function, the multiplier, disposable income, the tax multiplier

2. Without using any equations, explain why any initial change in spending (a variation in autonomous spending, Mo) will shift the AD curve by much more than Mo.

3. Why are the ideas in #2 important wrt: a. the magnitude of business cycles in different countries b. guiding the govt when it wants to use fiscal policy to get y = Yp.

4. Answer each of the following wrt the consumption function: C =Co+ c(y- Tx)- aP: a. what name is given to Co? b. what might cause Co to increase? .... or to decrease? c. what do we call "c"? d. what is the common sense meaning of"c"? e. why does P exert a negative influence on C? f. what name do we give (y - Tx)?

5. In the investment function: I= Io- vr, a what do we call Io, and what makes it change in value? b. why does "r" exert a negative influence on planned investment?

6. What is the difference between "planned" investment and "actual investment"?

7. Write the short run equilibrium equation for GDP, using the C function in #4 and the planned investment function in #5; also, let G, and NX be exogenous.

a. solve this equilibrium equation for y. b. what term on the rhs represents "the multiplier"? What is the logic underlying the

multiplier concept?

8. What is the relationship between the MPC and the MPS? What is the common sense logic underlying this relationship?

9. Write the formulas for: the multiplier and the tax multiplier. Why is the tax multiplier smaller in absolute value?


202 Chapter 11 Problem~>

1. If the MPC = .75 then what is the value for the multiplier? How about ifMPC = 2/3?

2. How much (and m what direction) will the AD curve shift if the MPC == .75 and a. G increases by 1 b b. Io .Iilcreases by 10 c. NX decreases by 1 0 d. Co decreases by 10 e. G decreases by 25 f. the price level doubles

3. Let C = 20 + .8(y- Tx) - lOP; I= Io = 30; G =50, NX == 10, P = 1, and Tx =50. What 1s the value for the short run eqlillibrium income and output?

4. Do #3 tf everything is the same except that Grises to 60. Calculate the change in equilibrium y (compared to #3) diVided by the change mG. Is this the same as 11(1-MPC)?

5. Do #3 if everything 1s the same as m #3 except that net exports deteriorate by 5.

6. Suppose that the multiplier is 5 and Yp = 400 when actual y = 350. By how much must govetnment spending increase in order to eliri::I.inate this recessionary gap?

7. Do #6 if the Iimltipher is 4, Yp = 500, and actual y = 400.

8. What is the value for the .tnulnplier if C = 40 + .5(y- Tx)- 20P?

9. Do #8 ifC =50+ .5(y - Tx) - 30P.

10. Do #8 if C = 40 + .. 9(y- Tx) - 20P.

11. Potential output is 1000 m a country where C =50+ (2/3)(y- Tx)- SOP; P = 1; I= Io = 80; G = 130; Tx == 60, and there is a net export deficit of 10. The country is clirrently producing its short run equilibarillttl output. Is there a recessionary or inflationary gap? What is the value for this?

12. In #11, what change in government spendmg is needed to get the short run equilibnum output equal to its potential value? When this happens, what is the relationship between AD and'Y.p?

13.,:Do #11 and #12 if everything is the same as in #11 except that Yp = 400.

- 14. What change in government expemliture is needed to get actual output equal to potential output If y= 400, Yp = 500, and the :MPC = .50?

15. Do #14 ifMPC = .90, y = 800, and Yp = 500.

21 ECO 202 I - Spring 2012

1. 4, 3

Answers to Cb. 11 Problems

b. 40 to the right d. 40 to the left

'2a. 40 to the right c. 40 to the left e. 100 to the left f. no slnft; a change in P moves you along the AD curve

3.300

4. New y = 350; 11y =50; Ay/11G = 50/10 = 5; and 1/(1-MPC) = 11(1-.8) = 11.2 = 5.

5. 11y:: 5 x -5 = -25; thus, the new equilibrium y = 275, wlnch IS 25 less than in #3.

6. You need 11y =+50; the multiplier is k = 5. Solving 5AG =+50 gives /10 = + 10.

7. You need 11y = +100, and the mulhplier is k = 4. Solving 4AG = +100 gives AG =+25.

8.2

9. 2, "Qe~ailse the value for the MPC is unchanged

10. 10

11. Solvrng for the short run equilibrium output gives y = 480. Since Yp = 1000 there 1s an recession~ gap of 520.

12. We need Ay == +520; since tbe muluplier is k = 3, solving 311G = +520 gives b.G = 520/3. You will end up with AD= Yp.

13. In this case the short run equilibrium remams y = 480, but now Yp = 400. Thus, there Is an inflationary gap of80. We need Ay = -80 when the mulnplier is k = 3. Solving 311G = -80 gtves the solution bG = -80/3.

14. The multipher is k = i, and we need Ay ~ + 1 00; solving 2AG = + 100 gives AG =+50.

15. Now the multiplier is k = 10 and we need 1011G == -300; thus, AG_= -30.

22 ECO 202 I - Spring 2012


1. Defme and/or explain: misery index; demand pull inflation; supply push inflation; real business cycle, RBC, theory; a negative supply shock; a negative demand shock, labor hoarding, Keynes Law

2. How many business cycles have there been since WWTJ.? a. what is the ave duration of downswings, and what has been happening to them? b. what is the ave duration of upswings, and what has been happening to them? c. what is the longest upswing on record? when did it occur?

3. What are "negative D shocks" and "negative S shocks"? Use the AD vs AS graph to show how these cause recessions. What has been the most important type of each shock in the USA since WWII?

4. What is true about the infla rate in the US: a. in the 1960s b. in the 1970s . .. by what% did prices rise in this decade? c. since the mid -1980s

5 Solve the equation of exchange in % change form for the inflation rate; then use this to explain why long run inflation is always caused by too rapid a monetary growth rate compared to the rate of economic growth for the economy. (What assumption about Vis being made here?)

6a. Use the AD and LRAS plus SRAS graph to illustrate and explain: i. demand pull inflation ii . cost push inflation

b. What has been the most important cause of cost push inflation in the US since WWII?

7a. Use the AD and AS graph and the ideas associated with the NRH (Natural Rate Hypothesis) to explain why D-pull inflation involves repeated increases in nominal wage rates, and, hence, often looks like cost-push inflation.

b. Use the graph in 7a to show what happens to prices over time if the govt foolishly tries to keep output greater than Yp.

8. Explain the RBC theory in the following manner. First, explain it in the most general terms by using an AD and AS graph to illustrate which curve shifts to cause business cycles. Then tell me:

a. what does it implicitly assume wrt price and nominal wage rates? b. what facts about labor productivity, APL, does it use? c. how is the APL affected by decreases in the ratio (useful K)IL? d. how might advances in tech reduce the ratio (useful K)IL and APL? e. how your answer to (d) is used by the RBC people to explain recessions f. how the idea of "labor hoarding" might explain the facts in (b) above, and why this

weakens the RBC theory



I. Defme and/or explain: gross Tx, Tr payments, net Tx, Govt outlays, G expenditure on goods and services, Employment Act of 1946, tax wedge, crowding out, Laffer Curve

2. When does the Fed govt's fiscal year begin and end?

3. What has been true about the Fed govt' s budget, wrt surpluses or deficits, since 1961?

4. What is the difference between the govt budget deficit and the value for govt debt? What approximately are recent values for each of these?

5. Explain how higher government expenditure, G, and taxes, Tx, can reduce the level of potential output, Yp. Proceed as follows .

a. ifG is a larger% of total AD, then why might Yp be lower? (Ignore the effect ofTx on Yp.)

b. Use a labor mkt graph to illustrate and explain how a higher income tax on wages tends to reduce the equilibrium quantity oflabor. Be sure to point out which distance in the graph measures the ''tax wedge".

c. Use the aggregate production function graph to explain why your answer to b means a lower value for Yp when wages are taxed.

6. Explain how higher taxes can reduce the rate of economic growth. Proceed as follows. a. explain why the growth rate depends, in part, on the size of Investment, I; b. summarize the LF theory of interest by using the LF graph; c. explain how an income tax on interest that we earn will affect private Sv, and how this

alters the equilibrium r; d. what happens to the level ofl when the income tax rate on interest income increases?

7. Use the loanable funds graph to show how govt budget deficit affect: a. the equi r b. the level ofl c. the rate of economic growth d. crowding out

8. What is meant by "stabilizing fiscal policy"? What should the govt do to Tx and/or G if the economy is experiencing:

a. a recessionary gap? ... when was this done recently? b. an inflationary gap?

9. Why is "stabilizing fiscal policy" a good idea in theory but it is very difficult to use it in practice?

24 ECO 202 I - Spring 2012


1. An economy has a govt with the following data. Tr payments = 300; purchases of goods and services= 700; gross taxes= 600. What is the value for:

a govt outlays b. net taxes c. the budget surplus or deficit

2. Do each part of#l, except now let Tr payments= 100.

3. The labor mkt in an economy is given by the equations: W = 40- 2Ld and W = 8 + 2Ls. Initially there is no tax on wages. What is the equilibrium quantity of labor and the wage rate? Draw a graph that illustrates all of this.

4. Now assume that the govt in #3 levies a 50% income tax on all wages. a shift the labor demand or labor supply curve appropriately; b. write the new labor supply equation; c. solve for the new equilibrium values for the quantity of labor and the wage rate; d. use your answer to c to tell me what the income tax does to Yp; e. what is the numerical value (not the%) of the wage wedge?

5. Now start with the labor mkt equations in #3, but this time assume that the govt levies an income tax of75% on labor income. Answer each part of#4.

la. 1000 b. 300 c. -400 3. L = 8 and W = 24

Answers

2a. 800 b. 500 c. -200

4a. it shifts up & left b. (1-.S)W = 8 + 2Ls or W = 16 + 4Ls c. L = 6 and W = 28 d. Yp is reduced because L decreases e. wage wedge = 28 - 14 = 14

Sa. it shifts up and left b.(1-.75)W = 8 + 2Ls or W = 32 + 8Ls c. L = 8/10 and W = $38.40 d. Yp is reduced because L decreases e. wedge= $38.40-$9.60 = $28.80


1. Define and/or explain: federal funds rate; treasury bill rate; long term bond rates; discount rate, pushing on a string, credit crunch

2. What are the official policy objectives of the Fed?

3. Why does a low inflation rate tend to increase the economic growth rate? Above what inflation rate does empirical evidence suggest that economic growth slows down?

4. Why is there sometimes a conflict between the goal of max employment (min U) and low inflation? What is true right now?

5. There are 3 important economic variables that the govt would like to control, namely the exchange rate, the nominal money supply, and interest rates. How many of these can the Fed control? Which one does it currently try to control?

a. use the money mkt graph to illustrate and explain why the Fed cannot control i if it controls M· ,

b. use the money mkt graph to illustrate and explain why the Fed cannot control M if it controls the interest rate;

c. what must the Fed do to M ( & what type of open mkt operations must it engage in) if it is pegging i and: (i) P rises; (ii) y rises; (iii) y falls

6. Write the money supply equation that you learned earlier in the course. Then use it to explain what happens to the money supply and why it happens if the open mkt committee:

a. buys govt bonds; what kind of gap probably exists for this to happen? b. sells govt bonds; what kind of gap probably exists for this to happen?

7. Why is the Fed (more or less) politically independent? Do you think that this is a good idea? Why?

8. Explain a potential problem associated with monetary policy (called "pushing on a string") when the Fed wants to increase AD. Give two times in history when this problem existed.

9. Explain the potential problems associated with the Fed increasing interest rates in order to decrease AD and fight inflation:

a. by having one great big hike in "i": (roughly how many times has this happened since WWII?)

b. by having many consecutive (every few months) small increases in "i"

10. Answer #9 for the case when the Fed is decreasing interest rates in order to stimulate AD and prevent a recession.

11. What is the ave lag between a monetary policy that alters interest rates and the desired change in AD and output? Why does this lag exist?

12. Write and explain the simplified (as given in my lecture) equation for Taylor's Rule.


radon

Sticky Note

ignore exchange rate

radon

Sticky Note

low inflation, low unew: sock mkt stableization (not on test)

radon

Sticky Note

inflation rate not correlated with growth rates<= 8%, for infation > 8%, higher inflation goes with lower growth rates

radon

Sticky Note

reason: own money

radon

Sticky Note

A. FED can always fight inflation (increasing intrest rates and or decreasing mo, will be less borrowing and spending if banks have less money to lend) B. Fed may be unable to prevent recession/depression. can fill banks with funds and lower intrest rates, but: i. cant force banks to lend - credit crunch ii. cant force ppl to borrow and spend

radon

Sticky Note


1. Money demand is given by MD = P[lOO + 4Y -lOOi] and the nominal money supply is 1000. What is the value for the real rate of interst if the current inflation rate is 2% and if P = 10 right now, while Y = 1 00? [Hint: use the MD = MS equilibrium equation.]

2. Use the money demand equation in #1 and the assumption that P = 10 andY= 100 to determine the appropriate nominal money supply if the Fed wants to peg the nominal interest rate at i = .10.

3. Use Taylor's Rule to determine the US real rate of interest ifthere is a recessionary gap of 50 when potential output is 1000 and the inflation rate is 4%.

4. An economy is in short run equilibrium with P =1 and actual output equals potential output ofYp = 4000. The economy is characterized by C = 100 + .9(y- Tx)- 1 OOP; Tx = 1 00; I= 400- 50r; G = 300; and NX = -100. What is the value for the real rate of interest? (Hint: Solve y = C+I+G+NX for r.]

5. IfYp rises to 5000 in the economy in #4 and everything else stays the same, then by how much must the Fed change the real rate of interest in order to get the new short run equilibrium level of output up to equal the new value for Yp? [Hints; find out how much I must rise to get y = Yp; then use the investment equation in "change" form to determine how much r must fall in order to induce the appropriate change in I.]

6. If money demand in #4 is given by: MD= P[100 + 2y- 50i], with P =l,and if there is zero inflation so that i = r, then by how much must the Fed change the money supply in #5 in order to achieve the required change in r that you calculated in #5? Hints: Solve the MD = MS equation in "change" form, ~ = 2!l.y - 50!l.i. (You know the values for !l.y and !l.i.)

7. Use Taylor's Rule to calculate the real rate of interest if the inflation rate is 10% and if there is: a. an inflationary gap of 5% d. a recessionary gap of 10% b. an inflationary gap of 10% e. y = Yp c. a recessionary gap of 5%

8. An economy has Yp = 1000 and the Fed pegs the real and nominal interest rates at 10%. (User= i = 1 0.) Also, C = 200 + .9(y-Tx)- 1 OOP; I = 200- 1 Or; G = 200; NX = 200; Tx = 100. What will be the value for the price level when the economy is in long run equilibrium?

9. If the demand for money in #8 is given by: MD= P[300 + 4y- 100i], then what value for the nominal money supply must the Fed provide in order to have actual y = Yp when the nominal and real interest rates are pegged at 10%? (Again use r = i = 10.

10. An economy is initially in equilibrium with actual y = Yp and P = 10. The natural rate of unemployment is Un = .06. What is the value for the actual unemployment rate?


11. In #10, the Fed pegs the real and nominal interest rates at 6% (use i = r = 6) and the economy is characterized by C = 400 + .5(y- Tx)- SOP; I= 1000- 1 OOr; G = Tx = 400, and NX = 0. What is the value for Yp?

12. If money demand in #11 and #10 is given by MD = P(100 + Sy -100i], then what is the value for the nominal money supply when the economy is in equilibrium producing its potential output with nominal and real interest rates pegged at 6%. (Again, use i = r = 6.)

13. An economy has a potential output of 1000 and a natural rate of wnemployment of 5%. Also, the Fed pegs the real and nominal interest rates at 20%. (Use i = r = .20). Furthermore, the conswnption function is C = 200 + .9(y- Tx)- 1 OOP; I= 400- 50r; G = 200; Tx = 100, and NX = -100. What will be the value for the price level when the economy is in LR equilibrium?

14. What is the value for the uemployment rate in # 13?

15. If the demand for money in #13 is given by MD= P(400 + 2y- 500i), then what value forM must the Fed choose if it wants to peg nominal and real interest rates at 20%, and have actual output equal to Yp? (Use i = .20)

Answers

1. Solve MS =MD to get i = 4; r = i- infla rate= 4- 2 = 2 2. M=4900 3. r = .02 - .5(50/1 000) + .5 x .04 = .02 - .025 + .02 = .015 4. Solve y = C +I+ G + NX for r and get r = 2.2 5.We need /1y = +1000; also ifk is the multiplier, then we have kAI = /1y; thus, we need /1I = +100, because k = 10 here. The Investment equation in "change" form isM= 0- 50&. Substitute 100 for M, and solve to get l1r = -2. 6. Your answer to #5 is l1r = -2 = 11i, because P is fixed here by assumption. With P = 1, the money mkt equilibrium equation in "change" form is: 11M= +2/1y- 50/1i. Substitute 1000 for /1y and -2 for l1i to get 11M= +2100. 7a .095 b .. 12 c.045 d . . 02 e .. 07 8.P=5.1 9. M = 5.1(300 + 4 X 1,000- 100 X 10) = 5.1 X 3300 = 16,830 10. U = Un = .06 or 6%, because actual y = Yp 11. Yp = 1000, because Yp = y here, and the equations can be solved for SR equi. y = 1000. 12. M = 10(100 + 5 X 1000- 100 X 6) = 10 X 4500 = 45,000 13. p = 5 14. U=Un=S% 15. M = 5(400 + 2000- 100) = 11,500.


Documents

econ pack