econ

ECON 352 Intermediate Macroeconomics

Purdue University

Problem Set 2

Soojin Kim

Spring 2015

Due beginning of class on March 10 (Tuesday)

1. Consider the following bank balance sheet.

Assets Liabilities

Reserves $10,000 Deposits $100,000 Loans $100,000 Debt $20,000 Securities $40,000 Equity $30,000

(a) What is the leverage ratio at this bank?

(b) What is the reserve ratio at the bank?

(c) If all banks had the same reserve ratio, and the original deposit amount from the economy

is $100,000. How much money can be generated from the original deposit of $100,000?

2. Assume that the monetary base (B) is $100 billion, the reserve-deposit ratio (rr) is 0.1, and

the curreny-deposit ratio (cr) is 0.1.

(a) What is the money multiplier (m)?

(b) What is the money supply (M)?

(c) If rr increases to 0.2, but everything else stays the same, what is the money supply?

Explain why it is higher or lower than before.

(d) If cr increases to 0.2, but everything else stays the same (rr = 0.1, B = $100 billion),

what is the money supply? Explain why it is higher or lower than before.

3. Suppose the money demand function (demand for real money balances) takes the form

( M

P

)d =

Y

5i .

(a) What is the velocity of money in this economy?

(b) Suppose nominal interest rate is constant. If output grows at rate g, at what rate will

the demand for real money balances grow?

4. Assume that the inflation rates in 2010, 2011, and 2012 were 1%, 2%, and 3% respectively.

During the same periods, nominal interest rates were 5%, 5%, and 6%, respectively.

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(a) What are the ex-post real interest rates in 2010, 2011, and 2012?

(b) Suppose expected inflation rate in 2011 is the ex-post inflation rate in 2010, and expected

inflation rate in 2012 is the ex-post inflation rate in period 2011. What are the ex-ante

real interest rates in 2011 and 2012?

(c) If someone lends in 2011, based on the ex-ante inflation expectation in part (b), is he

better or worse off when the loan is repaid? Explain why.

5. Consider an economy where there are 100 unemployed persons and 900 employed persons.

The job finding rate (f) of the economy is 0.3 and job separation rate of the economy (s) is

0.02.

(a) What is the average spell of employment?

(b) What is the average spell of unemployment?

(c) How many unemployed persons find jobs?

(d) How many employed persons lose their jobs?

(e) What is the steady-state unemployment rate?

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