Reference no: EM132445131
1. Explain the difference between savings and investment as defined by macroeconomists. Which of the following situation represent investment? Saving? Explain.
1.a. You borrow from a bank and use the money to construct a garage for your car. b. David Letterman spends $20 million to buy a mansion built in 1950.
1.b. You earn $200 and deposit it in your bank account. d. Rachel buys 100 shares of existing Microsoft stock.
2. Suppose that this year's money supply is $700 billion, nominal GDP is $20 trillion, and real GDP is $12 trillion.
a. What is the price level? What is the velocity?
b. Suppose that velocity and the economy's output of goods and services remain constant. In order to have 10% inflation, how much should the Fed adjust money supply?
3. The government increases taxes by $100 billion. If the marginal propensity to consume is 0.85, what happens to the following? Do they rise or fall? By what amounts?
3.a. Public Saving b. Private Saving
3.b. National Saving d. Investment
4. Use market for loanable funds approach that we developed in class to explain what happens to national saving, private saving, private investment spending, and the rate of interest if the following events occur.
a. The government reduces the size of its budget deficit to zero by reducing gov- ernment spending.
b. Because of some uncertainty about future, at any interest rate consumers decide to save more.
c. Because of a new wave of technical change, businesses become very optimist about the profitability of their investments.
5. An economy has a monetary base of ten thousand $20 bills. Calculate the money supply for each scenario, and then answer part e.
5.a. All of the money is held as currency. 1
a. All of the money is held as demand deposits. Banks hold one hundred precent of deposits as reserves.
b. All of the money is held as demand deposits. Banks hold two percent of deposits as reserves.
c. People hold equal amounts of currencny and demand deposits. Banks hold two percent of deposits as reserves.
d. The cental bank decides to increase the money supply by five percent. In each of the above four scenarios, how much should it increase the monetary base?
6. Determine whether the following functions exhibit constant returns to scale
a. Y =K+K1/2L1/2 b. Y = K2/3L2/3
b. Y = K1/3L1/2 d. Y =K+2L
7. An economy has total output of 6000. Government purchases, G, are 1200 and total taxes are 1000. Consumption and investment are given by
C = 500-20r+0.7(Y -T), I = 1200 - 30r.
a. What is the equilibrium interest rate?
b. Calculate private, public, and national saving in this economy.
c. Suppose that government purchases are reduced to 1000. Redo the parts (a) and (b).