Download Principles of Macroeconomics

Principles of Macroeconomics
Fall 2015
Hartmann
Worksheet #5
Due: TBA
This is the last homework to be turned in for a grade. All answers can be placed on this sheet. If you need to start over, you
can download another copy of this file from class webpage, http://courseweb.stthomas.edu/mehartmann/macro/macro_econ.html
Note for this assignment I give you the components of Ms and monetary base. But, for the exam, you are required to
know this yourself. I will not provide it for you.
1.
Suppose U.S. banks buy $10 million in government securities from the FED for decreased reserves (i.e., cash). How
much can M1 change by? What about the monetary base? Assume RRR = .10 and there is no excess reserves.
Δ nonbank currency
Δ TC
Δ total deposits
Δ nonbank currency
Δ bank reserves
= Net Change in Monetary Base
2.
= Net Change in MS
Suppose U.S. banks sell $10 million in government securities to the FED for increased reserves (i.e., cash). How much
can M1 change by? What about the monetary base? Assume RRR = .20 and there is no excess reserves.
Δ nonbank currency
Δ TC
Δ total deposits
Δ nonbank currency
Δ bank reserves
= Net Change in Monetary Base
3.
= Net Change in MS
Suppose that the lack confidence in the United State’s banking system causes depositors to withdrawal $10 million
from their bank accounts and convert it into cash. After the banks have time to adjust (so that excess reserves are zero
again), how much will M1 change by? What will be the impact on the monetary base? Assume RRR = .10.
Δ nonbank currency
Δ TC
Δ total deposits
Δ nonbank currency
Δ bank reserves
= Net Change in Monetary Base
= Net Change in MS
4.
Suppose the FED wishes to use monetary policy to close an expansionary gap.
a.
Should the FED increase or decrease the money supply?
Decrease
(Circle one.)
b.
If the FED uses open-market operations, should it buy or sell government securities?
Buy
Sell
(Circle one.)
c.
Increase
Determine whether each of the following increases, decreases, or remains unchanged in the short run and in the
long run.
Short Run:
Market Interest Rate
Quantity of Money Demanded
Investment Spending
Aggregate Demand
Price Level
Real GDP
Increases
Increases
Increases
Increases
Increases
Increases
Decreases
Decreases
Decreases
Decreases
Decreases
Decreases
Remains unchanged
Remains unchanged
Remains unchanged
Remains unchanged
Remains unchanged
Remains unchanged
(Circle one.)
(Circle one.)
(Circle one.)
(Circle one.)
(Circle one.)
(Circle one.)
Increases
Increases
Decreases
Decreases
Remains unchanged
Remains unchanged
(Circle one.)
(Circle one.)
Long Run:
Price Level
Real GDP
5.
Quantity Theory of Money
a. What basic assumption about the velocity of money transforms the equation of exchange into the quantity theory
of money? (1 sentence or phrase)
b.
According the quantity theory of money, how much will nominal income change by if the money supply increases
by 5 percent and velocity remains the same? _________ (numerical answer) (Hint: we did a similar numerical
problem in lecture assuming the money supply doubled.)
c.
What will happen to nominal income if, instead, the money supply decreases by 8 percent and velocity remains the
same? _______ (numerical answer).
Optional Problems:
1. Using the quantity theory of money, identify two things that contributed to the hyperinflation that Germans experienced after
WWI. Also, explain why these contributed to the hyperinflation.
2. In the late 1970s, the U.S. was experiencing stagflation. To counter this, Paul Volcker, the former Fed Chairman, pursued
restrictive monetary policy in the early 1980s. Using the quantity theory of money, explain why he did this.
3. Using the quantity theory of money, explain why economists believe that the monetary policy the Fed pursued during the
Great Depression made the Great Depression longer and more severe.
4. “Financial market participants watch data on inflation extremely closely. A report that inflation is increasing or is higher than
expected often causes stock prices to fall sharply.” Why? Explain why the news of inflation hurt the stock market. (See
lecture notes.)
5. True, False, and Explain. The Federal Reserve sets interest rates.