Survey
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
Business cycle wikipedia , lookup
Pensions crisis wikipedia , lookup
Exchange rate wikipedia , lookup
Monetary policy wikipedia , lookup
Early 1980s recession wikipedia , lookup
Real bills doctrine wikipedia , lookup
Foreign-exchange reserves wikipedia , lookup
Fractional-reserve banking wikipedia , lookup
Helicopter money wikipedia , lookup
Modern Monetary Theory wikipedia , lookup
Quantitative easing wikipedia , lookup
Answer Key, Principles of Macroeconomics, 8e – Chapter 9 CHAPTER NINE Answers to Test Your Understanding Questions 1. a) and b) (The total money demand curve is $80 to the right of the asset demand curve.) c) d) Equuilibrium r = 8%; equilibrium quantity = $150 (Where MD and MS intersect.) Surplus of $10 . (The money supply of 150 is 10 more than the demand of 140) 2. See the table below: Interest Rate % 12 11 10 9 8 7 6 Asset Demand Transactions Demand 80 80 80 80 80 80 80 50 55 60 65 70 75 80 Total Demand 130 135 140 145 150 155 160 a) equilibrium interest rate: 8% (This is where the money demand of 150 is equal to the money supply.) b) equilibrium interest rate: 10% (This is where the money demand of 140 is equal to the money supply.) c) Surplus of money of $15 (At 11 percent interest, the money supply of 150 exceeds the money demand of 135). 1 Answer Key, Principles of Macroeconomics, 8e – Chapter 9 3. Whether the Bank of Canada buys bonds from chartered banks or from the public makes no difference to the change in the commercial banks' reserves. If the bonds are bought from the banks, there will be no change in the amount of demand deposits and the extra reserves can all be lent out. However, if they are bought from the public, then the amount of demand deposits at the chartered banks will increase as the bond sellers deposit their Bank of Canada cheques. Here, the amount of excess reserves will be slightly lower since the banks will want to keep a small fraction of these increased deposits. 4. a) Balance sheets after the purchase of securities from the chartered banks (the affected accounts are highlighted): All Commercial Banks Assets Reserves in vaults On deposit with the Bank of Canada Securities Loans Totals $70 12 118 600 800 Liabilities Deposits 800 Totals 800 Bank of Canada Assets Securities Totals Liabilities Notes in Circulation Deposits of banks Other liabilities $ 82 82 65 12 5 82 5. As a result of the switch, the reserves and the deposits of the chartered bank will increase by $100. Although the money supply is not immediately affected by the switch, the bank will find itself over-reserved by 90 (increased actual reserves of 100 minus increased target reserves of 10% x 100 = 10). Loaning out these excess reserves will result in an increase in demand deposits, which is part of the money supply. 6. Economic growth and full-employment are compatible goals but both can come into conflict with the goals of stable prices and a favorable balance of trade. In addition, full-employment and stable prices are in conflict. 7. It should sell bonds. 8. If prices increase, so too will money demand, which will push up interest rates and cause a drop in investment and real GDP. The aggregate demand curve, however, will not shift, but the aggregate quantity demanded will decrease, i.e., the price change causes a movement along the AD curve, not a shift in it. 2 Answer Key, Principles of Macroeconomics, 8e – Chapter 9 9. A reduction in the money supply will cause interest rates to rise and this will cause a decrease in investment and real income. 10. a) velocity of money: 10 b) P = $2.40 (2 x 500 ÷ 100) (120 x 10 ÷ 500) Answers to Connect Study Problems 1. a) 77 million drams (nominal GDP is real GDP x price level (70 x 1.1 = 77) b) 12.1 million drams. (The money supply must rise by the same 10% that GDP has increased: 11 million + 10% = 12.1) 2. a) $30B (so that all three curves intersect at a GDP of 420). b) 5% (20/400 x 100) c) 16.67% (20/120 x 100) 3. a) price level = 2; (P = MV/Q = 40 x 5/100 = 200/100 = 2) nominal GDP = 200 (Nominal GDP = M x V = 40 x 5 or P x Q = 2 x 100) b) price level = 2.4; (M increases by 8 (40 x 0.2) to 48. New P = MV/Q = 48 x 5/100 = 2.4) nominal GDP = 240 (Nominal GDP = M x V = 48 x 5 or P x Q = 2.4 x 100) c) Since a 20% increase in the price level leads to the same percentage increase nominal GDP, we can conclude that there is a direct and proportional relationship between the two. 4. 2.9% interest. Using the formula: Rate of return (rate of interest) = coupon interest +/- change in the bond price x100 Price paid for bond gives us: $350 - $200 x 100 = 2.9% $5200 5. a) Pabst: 6% b) Pabst: + 40 30 to 70) Kokanee: 7% (The intersection of the new MS with the MD.) (Interest rate drops from 8% to 6%. So investment increases from 3 Answer Key, Principles of Macroeconomics, 8e – Chapter 9 Kokanee: + 10 (Interest rate drops from 8% to 7%. So investment increases from 30 to 40) c) Pabst: + 80 (40 – the answer in b) – times 2). Kokanee: + 20 (10 – the answer in b) – times 2). d) Pabst (Because the change in GDP is much bigger than in Kokanee.) 6. a) Interest rate: 10%; (Where the MS of 80 equals the MD) investment: $160. (Reading of Graph B at an interest rate of 10%.) b) Interest rate: 6%; (Where the MS of 100 equals the MD) investment: $200. (Reading of Graph B at an interest rate of 6%.) c) See the following graph: Figure 9.13A (Completed) d) Interest rate: 12%; (Where MD2 intersects MS in Figure 9.13A (Completed)) investment: $140. (reading off Figure 9.13B in the text at an interest rate of 12%) 4 Answer Key, Principles of Macroeconomics, 8e – Chapter 9 7. a) See the following figure: Figure 9.14 (Completed) A rightward shift of 1 square of the MS curve in graph A will reduce the interest rate by 1% and this will cause a movement along the Id curve in graph B, which will increase investment spending by $50 (from $50 to $100). b) investment spending: $100 c) See Figure 9.14 (Completed) The AD will increase by $200. (The AD curve in graph C shifts to the right by 2 squares.) d) GDP: $700 (Where AD2 intersects the AS curve) 5 Answer Key, Principles of Macroeconomics, 8e – Chapter 9 8. a) See the the following tables: Table 9.1 (Completed) A: Central Bank of Beckland (1) Assets Treasury $190 $191 bills Short-term 5 5 loans to banks Liabilities Notes in Circulation Government Deposits Deposits of banks $185 (1) $185 6 6 4 5 B: Beckland's Banking System (1) (2) Assets Reserves: In vaults in Bank of Beckland Securities 8 4 8 5 8 5 30 29 29 Loans to customers 90 90 100 Liabilities Deposits Short-term loans from Bank of Beckland Equity 120 (1) 120 (2) 130 5 5 5 7 7 7 b) no effect in the money supply c) excess reserves of $1B d) see Table 9.1B (completed) column (2) e) + $10B 9. $4 / $96 X 100 X 4 (quarters) = 16.7% $4 / $96 X 100 X 6 (2 month periods) = 25% Thus, the rate of return has increased by 8.3% points 10. $21 200. Whoever buys the bond expects to receive a return equal to that on other investments, i.e. $2000 over two years ($20 000 @ 5% x 2). Since the holder will receive $3200 ($1600 x 2) in interest from the bond, that investor would be prepared to lose $1200 on the sale of the bond, i.e. they would be prepared to pay $21 200. 6 Answer Key, Principles of Macroeconomics, 8e – Chapter 9 11. a) Keynesian view: graph A; Monetarist view: graph B. b) Keynesian view: graph B; Monetarist view: graph A. c) increase by $10. (interest rate changes by 1%). d) increase by $160. (interest rate changes by 4%). 12 . a) Beckland: interest rate ↓ by 1% P: increases 4 points → (I & XN) ↑ by 20 → AD ↑ by 40 → GDP: increases $20 Heineken: : interest rate ↓ by 2% → (I & XN) ↑ by 20 → AD ↑ by 60 → P: increases 12 points GDP: increases $18 Answer to Comprehensive Problem a) See the following figure: Figure 9.16 (completed) b) 4%. This is where the new MS2 curve intersects the MD curve c) Increase of $20 billion. Figure 9.17 shows that at the previous interest rate of 5%, the quantity of investment was $80. At the new interest rate of 4%, the quantity of investment is $100. The difference is $20 billion higher. 7 Answer Key, Principles of Macroeconomics, 8e – Chapter 9 d) See the following figure: Figure 9.17 (completed) 150 140 AS 130 Price level 120 AD2 110 AD1 100 90 400 500 600 700 800 900 1000 Real GDP e) Price level = 125; real GDP = $750 billion. (Where AD2 intersects AS.) f) AD must be decreased by $200 billion. (The AD curve must be shifted 4 squares to the left so that it intersects the AS curve at a price level of 110 and a GDP level of $600.) g) Decrease of $40. (The change of investment is 1/5 of the change in AD.) h) Target interest rate = 7%. (For investment to fall by $40 (2 squares), the interest rate must increase from 5% to 7%. i) Decrease of $20 billion. (The money supply must drop by 2 squares in order to increase the interest rate from 5% to 7%. 8