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Homework answers / question archive / 1)What happens to M1 and M2 due to each of the following changes?   (a)          You take $500 out of your checking account and put it into a passbook savings account

1)What happens to M1 and M2 due to each of the following changes?   (a)          You take $500 out of your checking account and put it into a passbook savings account

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1)What happens to M1 and M2 due to each of the following changes?

 

(a)          You take $500 out of your checking account and put it into a passbook savings account.

 

(b)          You take $1000 out of your checking account and buy traveler’s checks.

 

(c)           You take $1500 out of your money-market mutual fund and deposit into your checking account.

 

(d)          You cash in $2000 in savings bonds and invest the money in a certificate of deposit.

 

 

 

 

2.            Why is per-capita U.S. currency demand so large? Who is holding large amounts of U.S. currency and why are they doing so? Should U.S. policymakers be concerned about this? Why?

 

 

 

 

 

 

3.            What happens to real money demand (rise, fall, or no change) due to a change in each of the following factors?

 

(a)          A tax on stock market transactions is introduced.

 

(b)          Computerized bond trading reduces transaction costs.

 

(c)           People’s average level of wealth rises.

 

(d)          The threat of a recession increases the riskiness of stocks and bonds.

 

(e)          The interest rate paid on checking account balances declines.

 

(f)           The price level falls in a one-time jump.

 

 

 

 

 

4.       Give five examples of factors that could reduce the demand for money.

 

 

 

 

5.            Describe the case of the missing money: when did it occur, what measure of money was relevant, why was the money considered “missing,” and who first discovered it? What explains why the money was missing?

 

 

 

 

 

 

 

6.       Suppose the money demand function is

 

Md/P ?  1000 ?  0.2Y – 1000 (r ?  πe).

 

(a)          Calculate velocity if Y ?  2000, r ?  .06, and πe  ?  .04.

 

(b)          If the money supply (Ms) is 2600, what is the price level?

 

(c)           Now suppose the real interest rate rises to 0.11, but Y and Ms are unchanged. What happens to velocity and the price level? So if the nominal interest rate were to rise from 0.10 to 0.15 over the course of a year, with Y remaining at 2000, what would the inflation rate be?

 

 

 

 

7.       Suppose the money demand function is given by

 

Md/P ?  640 ?  0.1Y – 5000 (r ?  πe).

 

Suppose the central bank changes the nominal money supply depending on income and inflation: Ms ? 1000 ? 0.1Y – 4000π.

 

(a)          If expected inflation equals actual inflation ? 0.03, Y ? 1000, and r ? 0.02, calculate the price level.

 

(b)          If inflation rises to 0.04 while the other variables remain as in part a, calculate the price level.

 

(c)           If expected inflation rises to 0.04 while the other variables remain as in part a, calculate the price level.

 

(d)          If the real interest rate rises to 0.03 while the other variables remain as in part a, calculate the price level.

 

 

 

 

 

 

 

8.            Calculate the change in the price level for each of the following events, taken one at a time, with other variables unchanged.

 

(a)          Money supply increases 10%.

 

(b)          Money demand increases 5%.

 

(c)           Money supply decreases 5% while money demand increases 5%.

 

(d)          Money supply increases 15% while money demand increases 5%.

 

 

 

 

 

 

9.            Why did some of the formerly Communist countries of Eastern Europe have inflation rates over 100%, while others didn’t? Which factor was more important in explaining the differing inflation rates, real money demand or nominal money supply? Why did the countries with high inflation rates allow inflation to get so high?

 

 

 

 

 

Essay Questions

 

1.            Describe the major features of the business cycle. Be sure to discuss what variables are affected by the cycle, a description of the key features that are apparent in the data, how variables are related to one another, how regular the cycle is, and how predictable the cycle is.

 

 

 

 

2.            When a recession occurs, do economists expect it to be a temporary phenomenon? Or is there some degree of permanence? What is the empirical evidence?

 

 

 

 

3.       How has the severity and duration of business cycles changed over time in the United States?

 

 

 

 

4.            What are some of the problems with using the leading indicators to forecast recessions? If you were a policymaker, would you rely on them?

 

 

 

 

 

 

5.            Suppose the economy is initially in long-run equilibrium. For each of the shocks listed below, explain the short-run effects on output and the price level.

 

(a)          A stock market crash reduces consumers’ wealth.

 

(b)          Businesses decide to hold larger inventories.

 

(c)           The government cuts defense spending.

 

(d)          Foreign countries buy more U.S. goods.

 

 

 

 

6.            Suppose the economy is initially in long-run equilibrium. For each of the shocks listed below, explain the long-run effects on output and the price level.

 

(a)          Labor supply decreases.

 

(b)          The government shuts down the Bureau of Economic Analysis.

 

(c)           Productivity increases.

 

 

 

 

7.            For each outcome below, tell what type of shift must have taken place in either the aggregate demand curve or the long-run aggregate supply curve.

 

(a)          In the short run, the price level is unchanged and output rises.

 

(b)          In the long run, the price level declines and output is unchanged.

 

(c)           In the long run, the price level rises and output declines.

 

 

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