What will be the new level of government purchases

Assignment Help Microeconomics
Reference no: EM131026004

Fall 1999: Homework 5-               

Part I:

Problem 1- In doing this problem assume there are no currency drains and that excess reserves equal zero.

(a) The FED sells $2000 worth of T-bills on open market operations. Does the money supply increase or decrease? What will be the total change in the money supply if the required reserve ratio is 20% of demand deposits? 

(b) The FED buys $1000 worth of T-bills from a bank in New York.  Does the money supply increase or decrease?  What will be the total change in the money supply if the required reserve ratio is 20% of demand supply? 

(c) Suppose Peter deposits his paycheck of $2000 in a bank in Madison. What will be the total change in money supply if the required reserve ratio is 20% of demand deposits?

Problem 2- Consider an economy where the required reserve ratio is 30% of demand deposits. Suppose, Anne sells $1000 worth of government securities to the FED and deposits the proceeds ($1000) into Madison First Bank.  (Again, assume no currency drains).

(a) Assuming that all accounts were initially in balance, draw the change in Madison First Bank's balance sheet after Anne makes her deposit.  Be sure to clearly label all entries.

(b) Suppose now, that Madison First Bank lends out any excess reserves to Kate who uses the entire loan to pay for a new Home Theatre System in Movies, inc.  She pays with a check and Movies, inc. deposits it at Wisconsin State Bank. Clearly indicate how would these transactions be registered at the Madison First Bank and Wisconsin State Bank balance sheets.

(c) Now suppose that Wisconsin State Bank lends out all of its excess reserves to Paul.  Paul deposits this loan at Bank Mendota and so on.  How would the balance sheet look like for all banks combined, after this lending cycle has taken place many times.

Problem 3- Consider the following economy:

Money market: Md = 4000 - 200r              

                       Ms = 2000

Output or goods market: C = 1000 + 0.75(DI) - 20 P

                                    I = 2500 - 30r

                                    G = 2000

                                    T = 1000

                                    DI = Y - T                             

Where P is price and r is the interest rate.

(a) Find the equilibrium interest rate. 

(b) Using your answer in part (a) and assuming P = 30, find the equilibrium level of output (Ye).  (Hint:  This is a Keynesian model where the price level is fixed).

Now suppose aggregate demand (AD) and aggregate supply (AS) are given by:

AD:  Y = C + I + G              

AS:  Y = 120P         

(c) Find the aggregate demand equation that relates output to prices.  Use your answer in part (a). (Hint: Think of a normal demand equation relating prices and quantities).

(d) Find the equilibrium level of output and prices.  (Hint:  Use your results in part (a) and (c).) 

(e) Suppose full employment GDP is 10800.  Does the current equilibrium GDP show an inflationary gap? 

(f) The government decides to modify its level of purchases in order to reach full employment GDP (i.e. YFE = 10800).

i. What will be the new level of government purchases? 

ii. Does the equilibrium price increase or decrease? Why? (Hint:  Don't use multipliers). 

(g)  Suppose now, that the Federal Reserve increases the money supply (Ms) to 2334 (and G = 2000). What is the new interest rate? Can we reach the full employment GDP (i.e. YFE = 10800)?

Part II:

Read an article from an economic or financial publication that has relevance for what we are learning in this class.  The "accepted" list of publications is Wall Street Journal, Financial Times, The Economist, Barron's and Business Week.  Obviously, this list is not intended to be comprehensive.  If you find a good and interesting article in any publication, printed or on the Internet, you are invited to read it.

Write one page (single spaced, font 10) review of the article you just read.  Attach a copy of the original article.

Your review will be graded according to its relevance for this class, the ideas you put forward, and your knowledge of written English.

Reference no: EM131026004

Questions Cloud

Heart block in the human heart : What are the most common causes of heart block in the human heart
Growth by organizational development : Develop an autonomous identity for an organization where you work or with whom you have been involved. Focus on the following: Reflect on your own organization's areas for growth by organizational development (OD) change intervention.
What are the most common causes of valve : What are the most common causes of valve defects that leads to disorders of the heart vaves
Difference between term and cash value life insurance : Explain the difference between term and cash value life insurance. Discuss the difference between the following cash value life insurance types: ordinary, variable, and universal.
What will be the new level of government purchases : The government decides to modify its level of purchases in order to reach full employment GDP (i.e. YFE = 10800). What will be the new level of government purchases? Does the equilibrium price increase or decrease? Why? (Hint:  Don't use multipliers)
Determine which two equations represent perpendicular lines : Anna has 12 bills in her wallet, some $5 and some $10. The total value of the bills is $100. How many of each bill does Anna have?
How does calculus relate to business in the real world : How does calculus relate to business in the real world?
Von neumann analysis stability : 3 part question (a, b, and c) for partial differential equations (diffusion/decay) and von Neumann analysis stability
Discuss an approach to resolving this ethical dilemma : What are Steve's obligations regarding preparation of an objective analysis in reporting results to Roberta? Refer back to the IMA Statement of Ethical Practice to structure your response.

Reviews

Write a Review

 

Microeconomics Questions & Answers

  How many hours does each of them work

A family has a target of $1500 for the income that it needs to earn each week. Both adults in the family work at ?exible jobs where they have a choice over how many hours to work.

  Conduct an analysis of a recent article

Conduct an analysis of a recent article and provide their evaluation and outcome expectations

  What caused the frustration among the country managers

What caused the frustration among the country managers? How could experiences be shared and best practices disseminated without compromising the uniqueness of the brands?

  State the lindeberg-levy central limit theorem

State Khinchine's weak law of large numbers and provide a proof of this result. Discuss conditions under which a law of large numbers exists for a sample of independent but heterogeneously distributed random variables.

  Two methods can a less developed country use for

What two methods can a less developed country use to finance its economic development. internal financing & debt rescheduling or else.

  Tax causes the equilibrium quantity of the good

Suppose a tax of $4 per unit is imposed on a good, and the tax causes the equilibrium quantity of the good to decrease from 2,000 units to 1,700 units.

  Explanayion of business cycles

The United States is currently recovering from its bad recession in over twenty-five years. Using the resource provided in this and earlier modules of course describe what factors

  What is the best general nondiscriminatory scheme

Go back to the parameterization of problem 3. What is the best general nondiscriminatory scheme from the point of view of the manufacturer?

  Explain the original budget constraint and new budget

suppose that in the year 2000 a typical social security recipient consumed only food and housing. the price of housing

  Supply or demand

Discuss one (1) recent price change that you have noticed while visiting your local supermarket. Speculate on whether or not the price change that you identified was a result of a change in either supply or demand. Provide a rationale for your re..

  What criteria and what alternatives should be used

Second, traf?c on the side street has grown to the point at which traf?c control may be upgraded from a stop sign in that direction. Provide guidance for a new engineer for each step of the decision- making process. For example, what criteria and ..

  What is the levelized cost of electricity

what is the levelized cost of electricity per kW-hr and Which press should you purchase if 120,000 nondefective units per year are produced by each press and all units can be sold?

Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd