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Assi 2 PDF

This document contains a macroeconomics problem set with multiple parts covering topics like the money market, money multiplier, and IS-LM model. It provides information on money demand and supply, checkable deposits, and consumption, investment, tax and government spending functions. It then asks the student to solve problems related to finding equilibrium in the money market, calculating the money multiplier, deriving the IS and LM curves, and analyzing the effects of monetary and fiscal policy changes.

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64 views3 pages

Assi 2 PDF

This document contains a macroeconomics problem set with multiple parts covering topics like the money market, money multiplier, and IS-LM model. It provides information on money demand and supply, checkable deposits, and consumption, investment, tax and government spending functions. It then asks the student to solve problems related to finding equilibrium in the money market, calculating the money multiplier, deriving the IS and LM curves, and analyzing the effects of monetary and fiscal policy changes.

Uploaded by

mailk jklmn
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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14.

02 Principles of Macroeconomics
Problem Set 2
Fall 2004

Posted: Wednesday, September 22, 2004


Due in class: Wednesday, September 29, 2004

Part I. True/False/Uncertain
Justify your answer with a short argument.

1. Paradox of saving occurs when the attempts by people to save more lead to a decline in output
and an increase in saving.

2. When mpc increases and investment decreases, goods market equilibrium output increases.

3. If investment is really sensitive to changes in the interest rate (b1 large), then IS is flatter and
fiscal policy is more effective. (assume: I = b0 – b1i )

4. The price of bonds increases when the interest rate rises.

5. Monetary contraction and fiscal expansion together lead to an increase equilibrium output and
interest rate.

6. The money multiplier is always less than 1.

Part II. THE MONEY MARKET


(all units are trillions of US $)

Money Demand: Md = $Y (0.2 – i)


Nominal Income: $Y = 2000
Money Supply: Ms = 300

1. Find Md for i = 10% and i = 5%.

2. What is the relationship between i and Md.

3. Graph Ms and Md and calculate the equilibrium i.

4. Alan Greenspan decreases Ms by 50.


What happens to money market equilibrium? (solve & graph )

5. Describe how the Fed changes i in the US.


Part III. Money Multiplier

Checkable deposits: Dd = $900 billion


Total money supply: Ms = $1800 billion
Reserve ratio: θ = 0.2
Ratio of (CUd / Md) : c = 0.5

1. Find CUd , Rd and Dd. in equilibrium.


2. Find the money multiplier.
3. Describe 2 different ways the Fed can decrease money supply.
4. If the Fed wants to decrease the money supply by $500 million (in order to raise i), what
amount of bonds would it have to sell/buy?

Part IV. IS - LM
(All units are millions of US dollars)

C = 200 +(0.25)YD
I = 150 + 0.25Y - 1000 i
T = 200
G = 250
(M/P)s = 1600
(M/P)d = 2Y – 8000 i

1. Find the equation for aggregate demand (Z).


2. Derive the IS equation.
3. Derive the LM equation.
4. Solve for equilibrium real output, interest rate, C and I.
5. Graph the IS-LM diagram of the above with correct labels.
6. Monetary expansion:
Let Ms (nominal money supply) increase to 1840. Find equilibrium Y, i, C and I. What
happens to Y, i, C and I when the Fed increases money supply through open market
operations?
7. Graph part 6 (a new graph starting from part 5).
8. Fiscal expansion: (Continue from part 5)
Let G increase to 400. Find equilibrium Y, i, C and I. What happens to equilibrium Y, i,
C and I when government spending increases?

9. Graph part 8 (a new graph starting from part 5).


10. There is a sudden drop in consumer confidence and c0 drops from 200 to 100. How can
the government counterbalance the drop in GDP using government spending as a policy
instrument?

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