Macroeconomics 104 – Assignment 3 (5% of final Grade)
1. 5. The diagram below shows the demand for money and the supply of money.
Figure. 1
a) Refer to Figure 1. Starting at equilibrium E0, what an increase in real GDP will lead to?
b) Refer to Figure 1. Starting at equilibrium E0, what an increase in the supply of money will result in?
c) Refer to Figure 1. If the interest rate is i2, What is the subsequent adjustment in the money market?
d) Refer to Figure 1. If the interest rate is i1, what is the subsequent adjustment in the money market?
e) Refer to Figure 1. Suppose the market interest rate is . How you describe the situation in this market?
f) Refer to Figure 1. Suppose the market interest rate is . How you describe the situation in this market?
2. a) What is the interest rate for a Treasury bill that pays $1,000 in one year, if the price of the Treasury bill today is 943?
b) What is the interest rate for the Treasury bill if its price is 917?
3. Use the following assumptions for this question. The commercial banking system has a target reserve ratio of 5% and there is no cash drain. A new immigrant to the country makes a cash deposit of $1,000. In the following table show how deposits, reserves, and loans change as the new deposit permits the banks to “create” money.
Round
Δ Deposits
Δ Reserves
Δ Loans
First
Second
Third
Fourth
Fifth
Complete the entire table.
You have now completed the first five rounds of the deposit-creation process. What is the total change in deposits so far as a result of the single new deposit of $1000?
This deposit-creation process will go on forever, but it will have a finite sum. In the text, we showed that the eventual total change in deposits is equal to 1/rr times the new deposit, where rr is the target reserve ratio. What is the eventual total change in deposits in this case?
What is the eventual total change in reserves? What is the eventual change in loans?
4. a) What is the price of a Treasury bill that pays $1,000 in one year, if its interest rate is 10 percent?
b) What is the price of the Treasury bill if its interest rate is 8 percent?
a) For 10 percent interest rate:
5. Consider the following macro model with demand-determined output:
C = 150 + 0.9,
= 0.8Y,
I = 400,
G = 700,
T = (0.2)Y,
X = 130,
IM = (0.08)Y.
What is the equilibrium national income (GDP)?
b) What is the margin propensity to spend MPS in this case?
What is the value of the multiplier?
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