Econ homework

1

Homework 2 ECON 301 A Summer 2020

DUE SUNDAY, 7/19/2020 9:00PM PST You must show all your work for each question. You are welcome to either fill out the answers by hand and scan them in, or you may alternatively just use a tablet and turn in the answers drawn on the tablet. You may consult with each other, but you must list all of the people in the course whom you discussed problems with in your submission. You do not need to include your answers on this sheet

QUESTION 1: The Fed is Different

A) Over the past three months, the Federal Reserve has adopted several new

policies/mechanisms/facilities to help fight the coronavirus recession. Research two of these new policies/mechanisms/facilities that the Fed has recently adopted. Give a basic description of how they work (for each, this description should be no less than 3-4 sentences, but no more than 2 paragraphs), and compare and contrast each new policy with ways the Fed has traditionally tried to meet its dual mandate. (You can find these by googling things like “new federal reserve facilities” and reading some of the corresponding press reports. The Fed also provides fact sheets about each policy. Also note some of these facilities are more complicated than others, so you may want to avoid programs that require a detailed understanding of the financial system).

QUESTION 2: Money Makes the World Go Round

A) If we assume that velocity is constant, then what is the main takeaway from the quantity equation for money? “Prove” it mathematically. (hint, this is directly on the slides)

B) If we no longer assume velocity is constant, but output is still fixed in the short run, then can the central bank increase real GDP by increasing the money? What if we instead assume that output is no longer fixed in the short run and that velocity is not constant?

C) Is the following statement true or false: “The Fischer Effect says that the real interest rate will never change because nominal interest rates will always adjust.” Explain why the statement is correct or incorrect.

2

D) We learned that seigniorage is when a government prints money directly to buy goods

and services, and this comes with a corresponding “tax.” For the following policies, discuss if there is a “tax” associated with the policy (you need to explain why it is or isn’t a tax). Note the tax may not apply to all groups of people/economic entities in the economy.

i. The Federal Reserve buys Treasury Bills from banks (i.e., they are doing expansionary open market operations).

ii. Congress issues debt (Treasury Bills) to buy new goods and services iii. The Federal Reserve aggressively raises interest rates, causing deflation.

QUESTION 3: Exchange Rates

The table below presents the nominal exchange rate between the US dollar and Applevokia Kroner and their respective inflation rates between 2015 and 2020 (note here the 𝑒𝑒 = 𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝑒𝑒𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴/𝑈𝑈𝑈𝑈, π = 𝑈𝑈𝑈𝑈 𝐴𝐴𝑖𝑖𝑖𝑖𝐴𝐴𝐴𝐴𝑖𝑖𝐴𝐴𝐴𝐴𝑖𝑖, π ∗= Applevokia inflation).

A) You and your friend are both in the US. Your friend observes the nominal exchange rate and tells you that it is a “good deal” to go visit Applevokia right now, especially compared to 2015. Is your friend right? What is right or wrong about their logic?

B) In which circumstance would you expect the trade balance, all else equal, to fall more for a “small” country (where small is as we discussed in lecture):

i. A civil war that takes place within the country ii. A world war, where major countries are also involved

Note in both cases, a war requires much greater government spending (so the government can produce guns, hire soldiers, build planes, etc etc).

C) Can the nominal exchange rate tell us anything useful about real goods and services, or is it just purely a nominal variable?

Nominal Exchange Rate and Inflation in America and

Applevokia Variable 2015 2020

e 20 30 π 4% 4% π* 4% 75%

3

Question 4: Solow Model

A) GLS Chapter 5, Exercise 1 (p. 104) B) GLS Chapter 5, Exercise 2 (p. 104) C) GLS Chapter 5, Exercise 6 (p. 106)