Week 1-3 PQs
1. You live in a country where only two products are produced: clogs (c) and tulips (t). We have information
on the output (Q) and the unit price (P) of the two goods in 3 consecutive years.
a. Calculate the nominal GDP, the real GDP (at 2015 prices) and the GDP deflator (the base year is 2015). A
single-digit accuracy is sufficient.
b. Calculate the yearly economic growth and GDP deflator-based inflation. A single-digit accuracy is
sufficient.
c. A consumption survey reveals that the average customer consumes 4 clogs and 4 tulips per year. Calculate
the CPI and the CPI based inflation. A single-digit accuracy is sufficient.
,2. In an economy three goods (a,b,c) are produced. For 2010 and 2016 we observe the following data. (Q and
P denote quantity and price respectively.)
Calculate nominal GDP for both years, a constant price GDP for 2016 (base year 2010) and calculate the GDP
deflator and the change in real income produced in the economy. Also calculate the average annual growth
rate of the real GDP. A single-digit accuracy is sufficient.
3. A country’s adult population is 14.1 million. The labour force participation rate is 52% and the number of
employed is 6.5 million. Calculate the unemployment rate.
4. People prefer to keep one-fifth of their money in cash. The reserve requirement in 20%.
a. Calculate the money multiplier (two-digit accuracy is sufficient).
b. Now you practice the basics of monetary policy planning. In the same economy as under (a), the growth
rate of the GDP of an economy in real terms (using constant price GDP) is 3.2%. There current amount of
money (M1) in the economy is 10Bn. Use the quantity theory of money to calculate by how much the Central
Bank should increase the quantity of base money in order to keep inflation at 2%?
,5. We know the following about the monetary state of the USA in 1929 and 1933 in expressed Billions of
dollars.
a. Calculate and compare the money multiplier in 1929 and 1933.
b. What would have happened to the money supply if the currency–deposit ratio had risen but the
reserve–deposit ratio had remained the same?
c. What would have happened to the money supply if the reserve–deposit ratio had risen but the
currency–deposit ratio had remained the same?
d. Which of the two changes was more responsible for the fall in the money supply?
6. To increase tax revenue, the U.S. government in 1932 imposed a 2-cent tax on checks written on bank
account deposits.
a. How do you think the check tax affected the currency–deposit ratio? Explain.
b. Use the model of the money supply under fractional reserve banking to discuss how this tax affected the
money supply.
, c. Many economists believe that a falling money supply was in part responsible for the severity of the Great
Depression of the 1930s. From this perspective, was the check tax a good policy to implement in the middle
of the Great Depression?
7. An economy has the following money demand function: , where Y and 𝑖 denote the
real income and the nominal interest rate respectively.
a. Derive an expression for the velocity of money. What does velocity depend on? Explain why this
dependence may occur.
b. Calculate velocity if the nominal interest rate is 4 percent.
c. If output Y is 1,000 units and the money supply M is $1,200, what is the price level P?
d. Suppose the announcement of a new head of the central bank, with a reputation for being soft on inflation,
increases expected inflation by 5 percentage points. According to the Fisher effect, what is the new nominal
interest rate?
e. Calculate the new velocity of money.
1. You live in a country where only two products are produced: clogs (c) and tulips (t). We have information
on the output (Q) and the unit price (P) of the two goods in 3 consecutive years.
a. Calculate the nominal GDP, the real GDP (at 2015 prices) and the GDP deflator (the base year is 2015). A
single-digit accuracy is sufficient.
b. Calculate the yearly economic growth and GDP deflator-based inflation. A single-digit accuracy is
sufficient.
c. A consumption survey reveals that the average customer consumes 4 clogs and 4 tulips per year. Calculate
the CPI and the CPI based inflation. A single-digit accuracy is sufficient.
,2. In an economy three goods (a,b,c) are produced. For 2010 and 2016 we observe the following data. (Q and
P denote quantity and price respectively.)
Calculate nominal GDP for both years, a constant price GDP for 2016 (base year 2010) and calculate the GDP
deflator and the change in real income produced in the economy. Also calculate the average annual growth
rate of the real GDP. A single-digit accuracy is sufficient.
3. A country’s adult population is 14.1 million. The labour force participation rate is 52% and the number of
employed is 6.5 million. Calculate the unemployment rate.
4. People prefer to keep one-fifth of their money in cash. The reserve requirement in 20%.
a. Calculate the money multiplier (two-digit accuracy is sufficient).
b. Now you practice the basics of monetary policy planning. In the same economy as under (a), the growth
rate of the GDP of an economy in real terms (using constant price GDP) is 3.2%. There current amount of
money (M1) in the economy is 10Bn. Use the quantity theory of money to calculate by how much the Central
Bank should increase the quantity of base money in order to keep inflation at 2%?
,5. We know the following about the monetary state of the USA in 1929 and 1933 in expressed Billions of
dollars.
a. Calculate and compare the money multiplier in 1929 and 1933.
b. What would have happened to the money supply if the currency–deposit ratio had risen but the
reserve–deposit ratio had remained the same?
c. What would have happened to the money supply if the reserve–deposit ratio had risen but the
currency–deposit ratio had remained the same?
d. Which of the two changes was more responsible for the fall in the money supply?
6. To increase tax revenue, the U.S. government in 1932 imposed a 2-cent tax on checks written on bank
account deposits.
a. How do you think the check tax affected the currency–deposit ratio? Explain.
b. Use the model of the money supply under fractional reserve banking to discuss how this tax affected the
money supply.
, c. Many economists believe that a falling money supply was in part responsible for the severity of the Great
Depression of the 1930s. From this perspective, was the check tax a good policy to implement in the middle
of the Great Depression?
7. An economy has the following money demand function: , where Y and 𝑖 denote the
real income and the nominal interest rate respectively.
a. Derive an expression for the velocity of money. What does velocity depend on? Explain why this
dependence may occur.
b. Calculate velocity if the nominal interest rate is 4 percent.
c. If output Y is 1,000 units and the money supply M is $1,200, what is the price level P?
d. Suppose the announcement of a new head of the central bank, with a reputation for being soft on inflation,
increases expected inflation by 5 percentage points. According to the Fisher effect, what is the new nominal
interest rate?
e. Calculate the new velocity of money.
