Homework assignment for weeks 3 and 4: (50 points total)
1. Using the factors affecting aggregate demand (AD) and short-run aggregate supply (SRAS) discussed in the textbook and throughout the course, explain—or use diagrams to illustrate—how each of the following three events affects either AD or SRAS. Focus exclusively on the impact on AD or SRAS, even if other variables are also influenced. Be sure to indicate how the equilibrium price level and output are affected. (6 points)
a. Optimal weather conditions resulted in a substantial rise in global crop yields, other factors unaffected.
b. To reduce the budget deficit, the government announces that households will pay much higher taxes beginning next year, other factors unaffected
c. The government increases military spending, other factors unaffected
2. Fiscal policy and income multiplier (TE and TP are in millions of dollars): (12 points)
a) What happens to business inventories if the economy is at $200 level of Real GDP? Will inventories increase, decrease, or remain unchanged? Briefly explain
b) If the economy is at $1,000 level of Real GDP will businesses increase production, decrease production, or maintain production at 1,000 level of Real GDP? Why?
c) Based on the TE and TP model in graph above, at what level of Real GDP ($0 to $1,200) will the economy finally rest? Briefly explain
d) Assume the economy is currently at $500 in Real GDP, with a marginal propensity to consume (MPC) equal to 88%. What level of autonomous consumption is required to raise total expenditure (TE) to achieve full employment at $1,000 in Real GDP?
3. Money and Banking:
Your local bank retains $400 of the $5,000 you deposited into your new checking account, as required reserve, and lends out the remaining $4,600. (8 points)
a. Why does the Federal Reserve require banks to hold required reserves? (3 points)
b. How does the bank’s decision to lend out all your $4,600 impact the total money supply in the economy, given a required reserve ratio of 9%, and the corresponding multiplier effect? (2 points)
c. By how much would the total money supply expand if you kept $1,000 of the $5,000 deposit in cash, assuming a required reserve ratio of 6%? (3 points)
4. Demand for money: (2 points each)
Discuss how each of the following events affects the demand for money. For each scenario, determine whether it causes a shift in the demand curve or a movement along it, and specify the direction of the change.
a. There is a rise in the interest rate from 5% to 10%.
b. Thanksgiving arrives and, with it, the beginning of the holiday shopping season.
c. The Fed engages in an open-market sale of U.S. Treasury bills.
5. Monetary policy: (10 points total)
An economy is experiencing a real GDP gap, as shown in the diagram below.
Question: What policy actions could be taken to eliminate this gap?
a. Should central bank use expansionary or contractionary monetary policy? ________________
b. Regardless of the policy choice in part a, should interest rates fall or rise? _______________
c. Regardless of the policy choice in part a, should consumer spending fall or rise? _________
d. Will the correct policy lead to an increase or decrease in Real GDP? __________________
e. Will the correct policy contribute to an increase or decrease in price levels? _____________
6. Open-Economy Macroeconomics: (8 points)
Based on the exchange rates from the first trading days of 2023 and 2024 shown in the table below:
a) Did the U.S. dollar appreciate or depreciate during 2024?
b) Did this change in the value of the U.S. dollar make American goods either more or less attractive to foreign buyers?
|
October 1, 2023 |
October 1, 2024 |
|
US$1.62 to buy 1 British |
US$1.62 to buy 1 British |
|
98.04 Japanese yen to buy |
95.05 Japanese yen to buy |
|
US$1.35 to buy 1 euro |
US$1.46 to buy 1 euro |
|
0.91 Swiss francs to buy |
0.96 Swiss francs to buy |
— US$ against British pound …
— US$ against Japanese yen …
— US$ against euro …
— US$ against Swiss francs …
