2. The Daisy-land’s economy is described as follows: [25 marks] Y=C+I+G; Y=10,000; G=2,000; T=3,000; C=2,000+0.5 (Y−T); I=3,000−150r. a. In this economy, compute private saving, public saving, and national saving. b. Find the equilibrium interest rate. c. Now suppose that G is increased by 1,000. Compute private saving, public saving, and national saving. d. Find the new equilibrium interest rate. e. Show the both equilibrium interest rates (the rates you found in part b and part d) on a graph.
3. Let the monetary base is $5,000. People hold four times more deposits (D) than currency (i.e. D=4C). The reserve-deposit ratio (rr) is given as 10%. [15 marks] a. What is the money supply? b. Suppose that people decide to hold more money and hence, we have now D=0.5C. If the central bank does nothing, what is the new money supply?
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Page 4 of 4 – Macroeconmics 1 (ECON1102)
c. In order to hold money supply as in part (a), what type of open market operation should be carried out and how much needs to transact?
4. Let money demand, (M/P)d=0.6Y/i. [20 marks] a. Calculate the velocity of money when the nominal interest rate i=10%. b. Calculate the price level (P) when M=$2000; Y=500 units; and the nominal interest rate i=10%. c. Suppose that the inflation expectation increased by 10% from its previous level. Calculate the new velocity. d. Assuming M and Y did not change, calculate new P. Comment on your results.
5. Consider an economy described by the following equations: Y=C+I+G+NX; Y=10,000; G=2,000; T=3,000; C=600 + 0.6(Y−T); I=800−100r; NX=4,000−250ϵ, r=r∗=6%. [18 marks] a. Calculate private saving, public saving, national saving, investment, the trade balance, and the equilibrium exchange rate. b. Suppose now that G is 4,000. Calculate private saving, public saving, national saving, investment, the trade balance, and the equilibrium exchange rate. Explain what you find comparing it to part (a).
6. Lala-land experiences an increase in productivity. How would this change in productivity affect the labor market (employment, unemployment, and real wages) if the labor market is always in equilibrium. Please draw a graph/graphs. [10 marks
