Macro Economics Question
Assignment # 2 Due on May 14, 2024 1. Distinguish between short-run and long-run supply curves. 2. What are the three basic functions of money? Describe how rapid inflation can undermine money’s ability to perform each of the three functions. 3. Suppose that aggregate supply decreases while aggregate demand is held constant. a. What happens to the price level? b. What happens to national output? 4. Suppose that the T-account for National Commercial Bank is as follows: Assets (thousands) Liabilities (thousands) Reserves SR 100 Deposit SR 800 Loan SR 700 Total SR 800 SR 800 a. If SAMA requires banks to hold 5% of deposits as reserves requirement, how much in excess reserves does the National Commercial Bank now hold? b. If National Commercial Bank decides to reduce its reserves to only the required amount, will the economy’s money supply increase or decrease? Explain. c. What is the money multiplier in this economy? 5. If the required reserve ratio is 10%, what will be the maximum change in the money supply in each of the following situations? a. Abdullah deposits in Riyad bank a check drawn on SNB bank. b. Abdullah buys a SR5,000 Saudi government bond from Saudi Central Bank by drawing down on his checking account. c. Abdullah sells a SR10,000 Saudi government bond to the Saudi Central Bank and deposit the SR10,000 in SNB bank. d. Abdullah writes a SR10,000 check on his own account and takes SR1,000 in currency and buries it in his backyard. 6. Assume that in an economy the total money supply, Ms, is SR100; the quantity of output, Q, is 50 units of a good; and the average price, P, of this output is SR10 per unit. Calculate the income velocity of money. 7. Suppose the price level and value of the U.S. dollar in year 1 are 1 and $1, respectively. If the price level rises to 1.25 in year 2, what is the new value of the dollar? If, instead, the price level falls to 0.50, what is the value of the dollar? 8. A commercial bank has $100 million in checkable-deposit liabilities and $12 million in actual reserves. The required reserve ratio is 10 percent. How big are the bank’s excess reserves? 9. Suppose the assets of the Silver Lode Bank are $100,000 higher than on the previous day and its net worth is up $20,000. By how much and in what direction must its liabilities have changed from the day before? 10. The balance sheet at the top of the next page is for Big Bucks Bank. The reserve ratio is 20 percent. a. What is the maximum amount of new loans that Big Bucks Bank can make? Show in columns 1 and 1′ how the bank’s balance sheet will appear after the bank has lent this additional amount. b. By how much has the supply of money changed? c. How will the bank’s balance sheet appear after checks drawn for the entire amount of the new loans have been cleared against the bank? Show the new balance sheet in columns 2 and 2′. d. Answer questions a, b, and c on the assumption that the reserve ratio is 15 percent.
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