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3/22/23, 9:50 PM Quiz: Problem Set 2 https://smu.instructure.com/courses/107673/quizzes/161048/take 1/11 Problem Set 2 Started: Mar 22 at 9:33pm Quiz Instructions Answer each question following specific instructions. Note that there are bonus points for submitting your written answers on Canvas. E-mailed answers can be accepted but no bonus points will be given unless it's on canvas. Remember every point counts, so plan ahead and submit your answers at least a day ahead so you can ask IT for help if it does not work in the first try. No extensions will be granted. 0 ptsQuestion 1 Upload Bonus points: Upload your written answers here Upload a file answering all the following exercises clearly showing how you reach each answer. Then answer the numerical questions below. I will check each file. Not uploading a file can result in the grade to all the below numerical answers be changed to 0. Ask IT for help if the upload does not work. 5 BONUS points (as fudge points at the end) are assigned ONLY if the file is uploaded on Canvas. E-mailed files might be accepted but no bonus points will be given. Choose a File Exercise 1: Equilibrium and Fiscal Policy in the Long Run 3/22/23, 9:50 PM Quiz: Problem Set 2 https://smu.instructure.com/courses/107673/quizzes/161048/take 2/11 Consider an economy described by the following equations: Y = C + I + G Y = 8,000. G = 2,500. T = 2,000. C = 1,000 + 2/3(Y — T). I = 1,200 — 100r. Upload a file answering all the following questions clearly showing how you reach each answer. Then answer the numerical questions below. I will check each file. Not uploading a file can result in the grade to all the below numerical answers be changed to 0. Ask IT for help if the upload does not work. 5 BONUS points (as fudge points at the end) are assigned ONLY if the file is uploaded on Canvas. E-mailed files might be accepted by no points will be given. 2.5 ptsQuestion 2 1,000 In this economy, compute private saving. 2.5 ptsQuestion 3 -500 Compute public saving (remember it can be negative). 3/22/23, 9:50 PM Quiz: Problem Set 2 https://smu.instructure.com/courses/107673/quizzes/161048/take 3/11 2.5 ptsQuestion 4 500 Compute national saving. 2.5 ptsQuestion 5 How much is the marginal propensity to consume (approximate to 2 decimal points)? 5 ptsQuestion 6 Find the equilibrium interest rate. Express it in percent. That is, if the interest rate if 4%, write 4, not 0.04. Assume that G is reduced by 500 ( in other words: ). This change remains for the rest of the questions. 2.5 ptsQuestion 7 Compute private saving. 3/22/23, 9:50 PM Quiz: Problem Set 2 https://smu.instructure.com/courses/107673/quizzes/161048/take 4/11 2.5 ptsQuestion 8 Compute public saving. 2.5 ptsQuestion 9 Compute national saving. 5 ptsQuestion 10 Find the new equilibrium interest rate. 5 ptsQuestion 11 Suppose that the government decreases taxes by the same amount it decreased government spending. What happens to the interest rate and investment in response to this balanced-budget change? Explain in words, and possibly using formulas to support your argument. 3/22/23, 9:50 PM Quiz: Problem Set 2 https://smu.instructure.com/courses/107673/quizzes/161048/take 5/11 p 0 words 5 ptsQuestion 12 How does your answer to the previous question depend on the Marginal Propensity to Consume? Edit View Insert Format Tools Table 12pt Paragraph Edit View Insert Format Tools Table 12pt Paragraph 3/22/23, 9:50 PM Quiz: Problem Set 2 https://smu.instructure.com/courses/107673/quizzes/161048/take 6/11 p 0 words 15 ptsQuestion 13 Exercise 2: Money - Banking You just won the lottery and are considering depositing your newly-earned money into a bank. You have two options: Banka and Banko. To make your decision, you ask for the balance sheets, which read: Banka's Balance Sheet Assets Liabilities Reserves $10,000 Deposits $100,000 Loans $100,000 Debt $20,000 Securities $40,000 Equity $30,000 Banko's Balance Sheet Assets Liabilities Reserves $10,000 Deposits $100,000 Loans $100,000 Debt $40,000 Securities $40,000 Equity $10,000 a. Because you are taking ECO3302 you know you have to look at the leverage ratio to decide. You calculate that the leverage ratio of Banka is and that of Banko is . b. You decide to go for the one that is less vulnerable in the event of a shock or recession. Therefore, you deposit your money in . 3/22/23, 9:50 PM Quiz: Problem Set 2 https://smu.instructure.com/courses/107673/quizzes/161048/take 7/11 Exercise 3: Monetary Policy in the Long Run In the nation of SMULand, people hold $2,000 of currency and $4,000 of demand deposits in the only bank, PerunaBank. The reserve–deposit ratio is 0.25. Answer the following numerical questions using this information. 2.5 ptsQuestion 14 a. What is the money supply? 2.5 ptsQuestion 15 b. What is the currency-deposit ratio? 3/22/23, 9:50 PM Quiz: Problem Set 2 https://smu.instructure.com/courses/107673/quizzes/161048/take 8/11 2.5 ptsQuestion 16 d. What is the monetary base? 5 ptsQuestion 17 d. What is the money multiplier? 5 ptsQuestion 18 e. Assume that PerunaBank is a simple bank: it takes in deposits, makes loans, and has no capital. What value of loans does the bank have outstanding? Assume PerunaBank does not hold any excess reserves on top of the mandatory ones as given by the reserve-deposit ratio. 5 ptsQuestion 19 Buy f. Demand Central Bank, the monetary authority at SMULand, wants to increase the money supply by 10 percent. Should it buy or sell government bonds in open-market operations? 3/22/23, 9:50 PM Quiz: Problem Set 2 https://smu.instructure.com/courses/107673/quizzes/161048/take 9/11 Sell 5 ptsQuestion 20 g. Assuming no change in the money multiplier, calculate, in dollars, how much (in dollars) the central bank needs to transact to increase the money supply by 10 percent. In other words, how much (in dollars) does the monetary base need to increase for money supply to increase by 10 percent? Exercise 4 : Inflation in the Long Run An economy has the following money demand function: , where i is the nominal interest rate expressed in percentage points already. Answer the following questions about this economy. 5 ptsQuestion 21 a. Calculate velocity if the nominal interest rate i is 4 percent. 3/22/23, 9:50 PM Quiz: Problem Set 2 https://smu.instructure.com/courses/107673/quizzes/161048/take 10/11 5 ptsQuestion 22 b. If output Y is 1,000 units and the money supply M is $2,000, what is the price level P? 5 ptsQuestion 23 c. Suppose the announcement of a new head of the central bank, with a reputation of being soft on inflation, increases expected inflation by 5 percentage points. According to the Fisher effect, what is the new nominal interest rate? 5 ptsQuestion 24 d. If, in the aftermath of the announcement, both the economy’s output and the current money supply are unchanged, what is the new price level? 3/22/23, 9:50 PM Quiz: Problem Set 2 https://smu.instructure.com/courses/107673/quizzes/161048/take 11/11 Not saved Submit Quiz