Assignment

Principles of Macroeconomics
Lecturer: Lestano, Ph.D.
Faculty of Economics, Universitas Multimedia Nusantara, Jakarta
Covered topic: Ch. 29, Ch. 30, Ch. 32, Ch.33 and Ch. 34
To be handed: at Final Exam date and using folio paper size

1. Assume that the banking system has total reserves of $100 billion. Assume also that
required reserves are 10 percent of checking deposits, and that banks hold no excess
reserves and households hold no currency.

(a) What is the money multiplier? What is the money supply?

(b) If the Fed now raises required reserves to 20 percent of deposits, what is the
change in reserves and the change in the money supply?

2. Suppose that this year’s money supply is $500 billion, nominal GDP is $10 trillion,
and real GDP is $5 trillion.

(a) What is the price level? What is the velocity of money?

(b) Suppose that velocity is constant and the economys output of goods and services
rises by 5 percent each year. What will happen to nominal GDP and the price
level next year if the Fed keeps the money supply constant?
(c) What money supply should the Fed set next year if it wants to keep the price
level stable?
(d) What money supply should the Fed set next year if it wants inflation of 10
percent?

3. Answer all of the following questions.

(a) Why are budget deficits and trade deficits sometimes called the twin deficits?
(b) Suppose that a textile workers’ union encourages people to buy only American-
made clothes. What would this policy do to the trade balance and the real
exchange rate? What is the impact on the textile industry? What is the impact
on the auto industry?
(c) What is capital flight? When a country experiences capital flight, what is the
effect on its interest rate and exchange rate?

4. For each of the following events, explain the short-run and long-run effects on output
and the price level, assuming policymakers take no action. Use diagram of long-run
and short-run AS, and short-run AD to answer the question.

(a) The stock market declines sharply, reducing consumers wealth.

(b) The federal government increases spending on national defense.
(c) A technological improvement raises productivity.
(d) A recession overseas causes foreigners to buy fewer U.S. goods.

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5. Explain how each of the following developments would affect the supply of money,
the demand for money, and the interest rate. Illustrate your answers with diagrams.

(a) The Federal Reserve raises the discount rate.

(b) A wave of consumer pessimism reduces aggregate demand
(c) Banks begin to pay interest on all checkable deposits.
(d) The Federal Reserve sells bonds in open market operation.
(e) Household income raises.