Econ homework

Homework 3: (55 points total)

1. Aggregate Demand.

In context of Aggregate Demand (AD), give 2 reasons why there is an inverse relationship between CPI and quantity of real GDP demanded in the economy, explain the inverse relationship. (5 points)

2. Fiscal policy.

Current macroeconomic situation in county X is shown on graph below. Help this economy move back to full employment at 10 trillion real GDP by answering the following questions.

I. Is country X facing a) Recessionary gap, or b) Inflationary gap? (2 point)

II. Country X should use, a) Expansionary, or b) Contractionary Fiscal Policy. (2 points)

III. How would your chosen fiscal policy be implemented? (3 points)

IV. Will a successful implementation of the policy in part III result in a shift in AD or SRAS, explain why. (4 points)

3. Money and Banking:

Tracy deposits $700 cash in a checking account at her local bank. The bank maintains a reserve ratio of 7.5%:

a. If every time the bank makes a loan, the loan results in a new checking deposit in a different bank equal to the amount of the loan, by how much could the total money supply in the economy expand in response to Tracy’s initial cash deposit of $700? (3 points)

b. By how much could the total money supply in the economy expand if this time Tracy holds $130 of the $700 in cash with the rest deposited in the bank? (3 points)

4. Demand for money:

How will the following two events affect the demand for money? In both cases, specify whether there is a shift of the demand curve or a movement along the demand curve, its direction, and briefly explain why.

a. The economy experiences a deflationary period. 
 (4 points)

b. The economy picks up and GDP increases while unemployment decrease. (4 points)


5.Monetary policy:

An economy is facing a recessionary gap shown in graph below. How should the Central Bank react using each of the 3 monetary policy tools to eliminate the recessionary gap? (9 points)

1) Open Market operations:

2) Discount rate:

3) Required Reserve Ratio:

A successful monetary policy will: Answer questions a – d.

(This is not a multiple-choice question, answer to each questions): (2 points each)

a. Increase/decreases the interest rate.

b. Increase/decreases consumer spending.

c. Increase/decreases real GDP.

d. Increase/decreases the aggregate price.

6. Open-Economy Macroeconomics:

Suppose the U.S. and Japan are the only two countries in the world. What will happen to the U.S. exports, and the value of the U.S. dollar (appreciates or depreciates) as the result of the following events (other things equal)?

a. The United States imposes import tariffs on many Japanese goods. 
 (4 points) 


b. Interest rates on savings bonds in the United States fall relative to Japanese savings bonds. 
 (4 points)


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