Download assignment #2

ST. FRANCIS XAVIER UNIVERSITY
ECONOMICS 100.13
Instructor: Dr. Anna Klimina
Macroeconomics: Quiz #2
Due: Tuesday, March 21st
Question 1 (20 marks)
I.
In the simplified banking system with the 6 per cent required reserve ratio
open market operations by the central bank add $200 million to the reserves.
a) What is the new level of total money supplied?
200m*1/0.06= 3333.33
1/r= 1/0.06=16.67
3133.33*16.67=52233.28
52233.28+3333.33=55566.61
Total money supplied is $55566.61 million
b) How much new money has been created?
Total money created is $52233.28 million
II.
If the banks keep only 2 per cent of their deposits as reserves,
c) What is the new level of total money supply?
200m*1/0.02= 10b
1/0.02=50
9.8b*50=490 b
490b+10b= 500b
Total money supplied is $500 billion
d) How much new money has been created?
Total money created is $490 billion
Question 2 (5 marks)
Using the equation of exchange, answer the following question:
Assuming velocity is constant and the money supply increases by 12 per cent, by how
much does the nominal output rise?
P*Q=M*V
Since the velocity is constant, and the money supply goes up by 12%, the nominal
GDP will also go up by 12%.
Question 3 (10 marks)
Suppose that a decrease in the demand for goods and services pushes the economy in
recession. What happens to the price level? If we believe the downward price flexibility,
and if the gov’t does nothing, what ensures that the economy still eventually gets back to
the natural level of output?
The price level will fall, because that is what happens during a recession. The
constructionary policy because of the price being flexible will ensure that the
economy still eventually gets back to the natural level of output.
Question 4 (10 marks)
Explain how the net export effect strengthens the effects an easy money and tight money
policy.
The interest rate and the investment from foreign countries will increase when the
price level from an economy decreases. This will increase the exports, which also
helps increase the strength of the easy money policy. If you want to strengthen the
tight money policy, the interest rate will go down, making foreign country
investment go down, and making goods more expensive, therefore decreasing
exports and strengthening the tight money policy.
Economics 100.13
QUIZ # 2
ALLISON DUGGAN
200506732