Which COMPONENT(S) (if any) of U.S. GDP (consumption C, investment I, government spending G, and/or net exports N X) THIS YEAR would be a¤ected and how (INCREASE or DECREASE) if:
1. Which COMPONENT(S) (if any) of U.S. GDP (consumption C, investment I, government spending G, and/or net exports N X) THIS YEAR would be a¤ected and how (INCREASE or DECREASE) if:
(a) You buy Exxon Mobil stock from a broker who charges you a small fee. (b) A German citizen buys a new house in Miami beach and rents it to a French citizen. (c) You buy an old computer for your business. (d) General Motors sells some cars that entered its inventory last year. (e) United Airlines buys a new Airbus airplane produced in Europe. (f) The government increases the monetary transfers to the poor. (g) You pay your tuition. (h) A new Boeing airplane is bought by Air China. (i) The government builds a new interstate highway. (j) A friend of yours buys some illegal drugs. (k) Taylor Swift releases a new single (assume nobody has bought it yet).
2. A closed economy is producing just oranges and lemons. The respective prices and quantities are listed below.
Year 2018 2019 Orange price $1.80 $2.00 Quantity of oranges 3,000 1,500 Apple price $1.90 $1.95 Quantity of apples 1,000 2,500 Assume that the listed quantities are also the ones bought by the “typical” consumer in the economy.
(a) Find the GDP de‡ator in 2019 if the base year is 2018. (b) Find the CPI in 2019 if the base year is 2018, assuming that the …xed basket used in estimating the CPI re‡ects the quantities bought in 2018. (c) Find the 2019 GDP in chained 2018 dollars. (d) If the implicit price de‡ator is set to 100 in 2018, …nd the implicit price de‡ator in 2019. (e) If the PCE price index is set to 100 in 2018, how much is it (approximately) in 2019?
3. A country’s population (civilians, age 16 or older) is 200 million. The labor force is 100 million people. 7 million people are unemployed.
(a) Find the unemployment rate and the labor force participation rate. (b) Imagine that a recession hit the economy and 4 million workers were …red. 3 million of them were not able to …nd jobs for some time, got desperate, and decided to wait for better economic conditions. The remaining 1 million are still looking for a job, but are not successful yet. Find the unemployment rate and the labor force participation rate. 1
4. Consider a closed economy where the marginal propensity to consume is 0.85. Expansionary …scal policy results in a $10 billion decrease in tax revenue and a $12 billion increase in the government budget de…cit.
(a) What is the (dollar) change in government spending? (b) What is the approximate (dollar) change in private, public, and national saving? (c) Will the equilibrium real interest rate increase, decrease, or stay the same? Use a supply-demand diagram for the loanable funds market to support your answer.
5. In June 2008, a bank saw a 5% drop in assets, a 30% drop in capital, but no change in liabilities.
(a) How much was the bank’s leverage ratio at the beginning of June 2008? (b) How much was the bank’s leverage ratio at the end of June 2008? (c) In July 2008, the bank’s assets decreased by 7%, while the bank’s liabilities remained unchanged. What was the percentage change in the bank’s capital in July 2018?
6. Consider an economy where banks keep 20% of deposits as reserves. Currency is 50 billion pesos, which constitutes 10% of the money supply.
(a) Calculate the currency-deposit ratio. (b) Calculate the money multiplier. (c) If the central bank requires a reserve-deposit ratio of at least 5%, calculate banks’excess reserves. (d) If the central bank buys 5 billion pesos worth of securities, calculate the percentage change in the monetary base and the percentage change in the money supply assuming that the currency-deposit ratio and the reserve-deposit ratio stay unchanged.
7. If reserves are scarce, how would the money supply M change (increase, decrease, or stay the same) and why (due to an increase, decrease, or no change in the monetary base B, in the reserve-deposit ratio rr, or in the currencydeposit ratio cr) if:
(a) the central bank conducts overnight reverse repurchase operations. (b) the central bank conducts overnight repurchase operations. (c) the central bank increases the required reserve-deposit ratio. (d) an article reporting a signi…cant surge in cases involving counterfeit currency becomes viral.
8. How would drug legalization a¤ect the overall price level (e.g., the GDP de‡ator)? When answering the question, assume that neither the demand nor the supply of drugs would change. In particular,
(a) Could the demand for real money balances be a¤ected? If yes, how? [Hint: a lot of money (purchasing power) is currently used to avoid prosecution for illegal activities] (b) Could the supply of money be a¤ected? If yes, how? (c) So, would the overall price level (e.g., the GDP de‡ator) increase, decrease, or stay the same? 2
9. The demand for real money balances is given by M P = p3Yi , where M is 100 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 2.5%. Over the year, the monetary base increases by 3%, the money multiplier increases by 1%, the output increases by 1.5% percent, and the nominal interest rate increases by 5 BASIS points.
(a) If the ex ante real interest rate equals 0.5%, …nd the expected in‡ation rate at the beginning of the year. (b) Calculate the percentage change in the velocity of money (if any). (b) [In answering this question, you are allowed to use the approximations regarding percentage changes; see slide 4 of the math review (slide set 2).] Calculate the actual in‡ation rate. (c) Is it true that purchasing power was transferred from borrowers to lenders?
10. [SHORT WRITING ASSIGNMENT. The assignment should be word processed in a standard font, e.g., Times New Roman size 12, double-spaced, and with standard margins. Expected length is about one page.] Choose a particular country (you are NOT allowed to choose the U.S.) or monetary union and discuss the monetary policy of its central bank in the period 2000-2020.
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