Reference no: EM131006926

Short Answer

Questions:

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1) You have decided to deposit $2,000 in a savings account in the Commonwealth Bank, which does not have any excess reserves at the time when you make a deposit.

a) How does your deposit change the Bank's T-account? Show the T-account changes.

b) Now the Bank is told to maintain a reserve ratio of 0.2 (ie, 20 percent).The Bank decides to make the maximum possible loan from the deposited funds. Following from theT-account in Part a), what does the T-account look like now?

c) Now, somebody who took out the loan in Part b) writes a cheque for the amount and then the person receiving the cheque deposits it in WestPac Bank which also maintains a reserve ratio of 0.2. Show how this changes the T-account of WestPac Bank.

d) If the process of money creation continues what is the total money supply resulting from your initial $2,000 deposit?

2) Suppose that the price level in Singaporeis expected to rise by 7% in 2017.

a) Why do some economists claim that we should not worry too much about inflation at this level?

b) Other economists think that there are significant costs associated with inflation above 2-3%. What are they?

c) What are the other costs be to consider if the inflation rate unexpectedly turns out to be higher than 7%?(2 mark)

3) Consider an economy that is initially in long run equilibrium in theAD-AS diagram that we covered in lectures. Start with the equilibrium pointshown in the Figure below and use it to demonstrate the following changes.

a) Suppose people in the economy start to become a bit worry about the future of the economy and decided to save more. This translates into an increase in private saving (we assume that this happens given any real interest rate and pricelevel).

i. How does this change the aggregate price level, real income and unemployment in the short run? Explain and illustrateit in AD-AS diagram

ii. On the same diagram illustrate the adjustment process to long run equilibrium (assuming that real potentialoutput remains unchanged, so no change in LRAS), and explain the final impact on the pricelevel.

Answer here (Tips: to create new lines (AD, SRAS, LRAS), simply copy the existing curves and move to the new locations)

b) Suppose many firms mistakenly expect that there willbe an increase in the relative price of their own productsas compared to others (including relative to the input costs and wages they pay). Start with the equilibrium point shown in the Figure below and use it to demonstrate the following changes.

i. How does this change the aggregate price level, real income and unemployment in the short run? Explain and illustrate in the AD-AS diagram

ii. On the same diagram illustrate the adjustment process to long run equilibrium (assuming that real potentialoutput remains unchanged, so no change in LRAS), and explain the final impact on the pricelevel.

4) Based on what you have studied so far in this course, discuss and describe some aspects of macroeconomicsthat can be useful in your future (...yes, it can be anything we discussed in this course).Your discussion should be more than half a page to a page in length.