Institute of Business Management
Semester: Summer
Course Instructor: Irfan Lal Total Marks:100 weighted 10
Date: 5/08/2019
Assignment No.3
Q#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.
Q#2 How would each of the following affect national saving, investment, the current account balance, and the
real interest rate in a large open economy?
a. An increase in the domestic willingness to save (which raises desired national saving at any given real interest rate).
b. An increase in the willingness of foreigners to save.
c. A temporary increase in government purchases.
d. An increase in taxes (consider both the case in which Ricardian equivalence holds and the case in which it doesn't
hold).
Q#3 Explain Demand for money and Determinants of the Demand for money?
Q#4 In a small open economy, desired national saving S = $10 billion + ($100 billion) r
w
desired investment, I = $15 billion - ($100 billion) r
w
output Y = $50 billion,
world real interest rate, r = 0.03.
w
government purchases, G = $10 billion,
Find the economy's national saving, investment, current account surplus, net exports, desired consumption, and
absorption
Q#5 Money demand in an economy in which no interest is paid on money is
Md/p = 500 + 0.2Y - 1000i.
a. Suppose that P = 100, Y = 1000, and i = 0.10.
Find real money demand, nominal money demand, and velocity.
b. The price level doubles from P = 100 to P = 200. Find real money demand, nominal money demand, and
velocity
Q#6
Suppose the money demand function is given by Md/P = 640 + 0.1Y – 5000 (r + π).
Suppose the central bank changes the nominal money supply depending on income and inflation:
Ms = 1000 + 0.1Y – 4000i.
(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.
Q#7. Explain Business cycle and cyclical behavior of macroeconomic variables (direction and timing)?
Q#8 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?
Semester: Summer
Course Instructor: Irfan Lal Total Marks:100 weighted 10
Date: 5/08/2019
Assignment No.3
Q#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.
Q#2 How would each of the following affect national saving, investment, the current account balance, and the
real interest rate in a large open economy?
a. An increase in the domestic willingness to save (which raises desired national saving at any given real interest rate).
b. An increase in the willingness of foreigners to save.
c. A temporary increase in government purchases.
d. An increase in taxes (consider both the case in which Ricardian equivalence holds and the case in which it doesn't
hold).
Q#3 Explain Demand for money and Determinants of the Demand for money?
Q#4 In a small open economy, desired national saving S = $10 billion + ($100 billion) r
w
desired investment, I = $15 billion - ($100 billion) r
w
output Y = $50 billion,
world real interest rate, r = 0.03.
w
government purchases, G = $10 billion,
Find the economy's national saving, investment, current account surplus, net exports, desired consumption, and
absorption
Q#5 Money demand in an economy in which no interest is paid on money is
Md/p = 500 + 0.2Y - 1000i.
a. Suppose that P = 100, Y = 1000, and i = 0.10.
Find real money demand, nominal money demand, and velocity.
b. The price level doubles from P = 100 to P = 200. Find real money demand, nominal money demand, and
velocity
Q#6
Suppose the money demand function is given by Md/P = 640 + 0.1Y – 5000 (r + π).
Suppose the central bank changes the nominal money supply depending on income and inflation:
Ms = 1000 + 0.1Y – 4000i.
(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.
Q#7. Explain Business cycle and cyclical behavior of macroeconomic variables (direction and timing)?
Q#8 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?
