ECON | 3010 | Intermediate Macroeconomic...
ECON | 3010 | Intermediate Macroeconomics | exam |Aadland – Spring 2015 Problem Solving / Essay Questions. (75 points) #11. (60 pts) Assume that currency ( C ) is \$10 billion and reserves ( R ) are \$20 billion, the reserve- deposit ratio ( rr ) is 0.1, and the currency-deposit ratio ( cr ) is 0.05. (a) (10 pts) What is the amount of demand deposits? What is the money supply? Show your work. (b) (10 pts) Just for part (b
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ECON | 3010 | Intermediate Macroeco...
ECON | 3010 | Intermediate Macroeconomics | exam |Aadland – Spring 2015 Problem Solving / Essay Questions. (75 points) #11. (60 pts) Assume that currency ( C ) is \$10 billion and reserves ( R ) are \$20 billion, the reserve- deposit ratio ( rr ) is 0.1, and the currency-deposit ratio ( cr ) is 0.05. (a) (10 pts) What is the amount of demand deposits? What is the money supply? Show your work. (b) (10 pts) Just for part (b
##### Page 1
Problem Solving / Essay Questions. (75 points)
#11.
(60 pts) Assume that currency (
C
) is \$10 billion and reserves (
R
) are \$20 billion, the reserve-
deposit ratio (
rr
) is 0.1, and the currency-deposit ratio (
cr
) is 0.05.
(a)
(10 pts) What is the amount of demand deposits?
What is the money supply?
(b)
(10 pts) Just for part (b), assume the monetary base increases by \$1 billion through an injection of
new reserves.
How much will this increase the money supply?
Show how much the money supply
will increase through the first two rounds of fractional-reserve lending.
(c)
(10 pts) Assume that the velocity of money is constant and real GDP growth is 2.5%.
Janet Yellen
and the Fed are targeting a 2% inflation rate.
What is the target growth rate in the money supply?
How much new money needs to be injected in the coming year to meet the target?
Explain.

##### Page 2
(d)
(10 pts) National savings is 200 and investment demand is
= 250
10
, where
r
is the real
interest rate.
Assuming the Fed hits the target inflation rate, what is the nominal interest rate?
BONUS (5 pts):
The government wishes to target a 3% nominal interest rate.
All else equal, how
much do they need to change government spending?
(e)
(10 pts)
The economy suddenly falls into recession and real GDP growth falls to -1%.
How should
the Fed change the money growth rate to maintain the 2% target for inflation?
Describe how the
Fed would implement this change in practice and provide some intuition for the results.
(f)
(10 pts) Nominal GDP is \$2.1 trillion.
Using the numbers in part (a), what is the velocity of
money?
More merchants start accepting credit cards, what will happen to the velocity of money?
Explain.

##### Page 3
Problem Solving / Essay Questions. (75 points)
#11.
(60 pts) Consider a macroeconomy that only produces two goods, A and B.
The base year is 2015
and all quantities are measured in billions.
Quantity
Prices
Product
2015
2016
2015
2016
A
100
105
\$20
\$20
B
50
52
\$100
\$105
(a)
(10 pts) Calculate the real GDP (Y) growth rate in 2016.
(b)
(10 pts) Calculate the inflation rate (
) in 2016 using the GDP deflator.

##### Page 4
(c)
(10 pts)
The money supply (M) is \$1000 in 2016.
What is the velocity of money?
Now assume the
Fed wishes to target a
2%
inflation rate in 2017.
If the growth in real GDP is expected to be the
same in 2017 as in 2016, what money supply growth rate is necessary?
How much new money must
the Fed inject into the economy?
(d)
(10 pts) Assume households hold 10% of deposits as currency and banks are required to keep 10% of
deposits in reserve.
Explain how the Federal Open Market Committee (FOMC), in practice, would hit
the M target in part (c).

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