Download Macroeconomic Principles Problem Set 1.1 Answer Key

Macroeconomic Principles
Problem Set 1.1 Answer Key-Week of January 11th
1. Solve for x in the following equations graphically and algebraically:
a. x*=5
b. x*=5/3
c. The two lines are the same. This means that any value of x will cause the two lines to equal
one another.
2. Chapter 17, Problem 2 in textbook (page 518)
a. Setting the quantity of pounds demanded equal to the quantity supplied, we have
10 – 2e = 4 + 3e  6 = 5e  e = 6/5, or 1.2 dollars per pound.
b. After the U.S. government intervenes, the demand for pounds equation becomes
12 – 2e. Resolving for equilibrium, the exchange rate climbs to 1.6 dollars per pound, a
depreciation of the dollar. The U.S. government might intervene in this way if it wanted
to help its export-oriented industries.
3. Chapter 17, Problem 3 in textbook (page 518)
a. Setting the quantity of pesos demanded equal to the quantity supplied, we have 100 –
2000e = 20 + 3000e e  e = 0.016 dollars per peso, or 62.5 pesos per dollar.
The exchange rate in pesos per dollar is found by taking the inverse of e,
1/e=1/0.016=62.5 pesos per dollar.
b. If the Philippine central bank wants to fix the exchange rate at 50 pesos per dollar it can
control the supply curve. To find how many pesos per month it should buy, remember that 1/50 =
0.02 dollars per peso. Insert this price into our equations, then set the supply for pesos equal to
the demand of pesos and solve for X, the autonomous supply of pesos. We have 100 – 2000(0.02)
= X + 3000(0.02) X = 100 - 5000(0.02)  X = 0. Therefore, the Philippine central bank
should remove 20 – 0 = 20 million pesos per month from the market. They can do this by
purchasing pesos from Philippine citizens.
4. Chapter 17, Problem 8 in textbook (519)
Since Country B has the higher inflation rate, its relative price level is rising. As its basket of
goods becomes relatively more expensive, only a depreciation of its currency can restore
purchasing power parity. Traders would buy Country A’s currency in order to buy its goods for
resale in Country B. Country A’s currency will appreciate relative to Country B’s (alternately
stated: Country B’s currency will depreciate relative to Country A’s).
5. Chapter 3, Problem 4 in textbook (page 85).
a.
Monthly rent
($)
Quantity (1,000s)
b. $1400 is the equilibrium price, and 19,000 is the equilibrium quantity.
c. At a rent of $1000, there is excess demand of 11,000 apartments. This excess demand will
drive the price up.
d. The supply curve will shift leftward from S1 to S2, as shown in part a. The resulting shortage
at the initial equilibrium price will drive the price up and the equilibrium quantity down (to
$1800 and 15,000 units in the example shown).
6. Chapter 4, Problem 10 (Page 117).
a. We start off at point A, where the housing market in Monotone is in equilibrium.
Without the special tax breaks, 500 new homes would be built in Monotone (dashed
vertical supply curve to the right of S1). With the special tax breaks we observe an
additional 300 new homes built, resulting in a new stock of Q+800 homes (vertical
supply curve S2). The special tax breaks only affect the home builders, i.e. suppliers, and
have no effect on demand. Demand, as usual in Monotone, shifts to the right by 500
homes. Since supply shifted to the right by more than demand, the price of homes in
Monotone will fall from P1 in the old equilibrium (point A) to P2 in the new equilibrium
(point C).
a) Tax Breaks for Home Builders
S1
S2
Price of
Homes
P1
A
C
2
D2
D1
Q
Q+500
Q+800
Stock of Homes
b. If zoning laws prevent construction of new homes in Monotone, the supply curve
is fixed at S1, while the demand shifts rightward from D1 to D2 by 500 homes, as
usual. This will lead the price to increase from P1 to P2.
b) Zoning Laws – No New Construction
S1
Price of
Homes
C
P2
P1
A
D1
Q
Q+500
D2
Stock of Homes
c. When the 2000 homes are destroyed following the 500 new homes built, the total
decrease in supply is 1500. The decrease in demand is 3000. Because demand decreased by
twice as much as supply, the price will decrease.