Preguntas de repaso teoria monetaria contestadas unidad 2 PDF

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Exercises on Monetary Theory 1.

Assuming the level of investment is $16 billion and independent of the level of total output, complete the following table and determine the equilibrium levels of output and employment which this private closed economy would provide. What are the sizes of the MPC and MPS? Level of Employment ($ million) 40 45 50 55 60 65 70 75 80

Real Domestic Output ($ billion)

Consumption ($ billion)

Saving ($ billion)

240 260 280 300 320 340 360 380 400

244 260 276 292 308 324 340 356 372

-$4 0 4 8 12 16 20 24 28

Saving data for completing the table (top to bottom): $-4; $0; $4; $8; $12; $16; $20; $24;$28. Equilibrium GDP = $340 billion, determined where (1) aggregate expenditures equalGDP (C of $324 billion + Iof $16 billion = GDP of $340 billion); or (2) where planned I= S(Iof $16 billion = Sof $16 billion). Equilibrium level of employment = 65 million;MPC = .8; MPS = .2. To find the level of consumption (column 2): Consumption = Income - Saving Example: at Income $300 Consumption = $300 - $8 = $292 To find the Average Propensity to Consume (APC) (column 4): APC = Consumption/Income Example: at Income $300 APC = $292/$300 = 0.9733 To find the Average Propensity to Save (APS) (column 5): APS = Saving/Income Example: at Income $300 APS = $8/$300 = 0.0267 To find the Marginal Propensity to Consume (MPC) (column 6): MPC = Δ Consumption/Δ Income Example: at Income $300 (from $280) MPC = $16/$20 = 0.8 To find the Marginal Propensity to Save (MPS) (column 7): MPS= Δ Saving/Δ Income Example: at Income $300 (from $280) MPS = $4/$20 = 0.2

1

2.

Linear equations for the consumption and saving schedules take the general form C = a + bY and S = -a + (1 - b)Y, where C, S, and Y are consumption, saving, and national income, respectively. The constant a represents the vertical intercept, and b the slope of the consumption schedule. Use the following data to substitute numerical values for a and b in the consumption and saving equations: National Income - Y- ($ billions) 0 100 200 300 400 B.

Consumption - C - ($ billions) 80 140 200 260 320

What is the economic meaning of b and 1 - b? C = $80 + 0.6xY; S = -$80 + 0.4xY b is the slope of the consumption function, the marginal propensity to consume (MPC), or the change in consumption relative to the change in income. (1-b) is the slope of the saving function, the marginal propensity to save (MPS), or the change in saving relative to the change in income.

C.

Suppose the amount of saving which occurs at each level of national income fall by $20 billion, but the values of b and (1 - b) remain unchanged. Restate the saving and consumption equations for the new numerical values, and cite a factor which might have caused the change? C = $100 + 0.6xY; S = -$100 + 0.4xY

3.

Suppose that the linear equation for consumption in a hypothetical economy is C = 40 + 0.8Y. Also, suppose that income Y = $400. Determine MPC, MPS, level of consumption, APC, level of saving, and APS? (a) 0.8; (b) 0.2; (c) $360; (d) 0.9; (e) $40; (f) 0.1. Feedback: Consider the following example. Suppose that the linear equation for consumption in a hypothetical economy is C = 40 + .8Y. Also suppose that income (Y) is $400. Determine (a) the marginal propensity to consume, (b) the marginal propensity to save, (c) the level of consumption, (d) the average propensity to consume, (e) the level of saving, and (f) the average propensity to save. Determine (a) the marginal propensity to consume: The marginal propensity to consume is the slope of the linear equation, which equals 0.8.

2

Determine (b) the marginal propensity to save: The marginal propensity to save is one minus the slope of the linear equation, which equals 0.2 (=1 - 0.8). Determine (c) the level of consumption: To find the level of consumption, substitute income into the linear equation. This results in a level of consumption of $360 (= $40 + 0.8 x $400 = $40 + $320 =$360). Determine (d) the average propensity to consume: To find the average propensity to consume, divide consumption by income. This results in an average propensity to consume of 0.9 (= $360/$400). Determine (e) the level of saving: To find the level of saving, subtract consumption from income. This results in a level of saving of $40 (= $400 -$360). Determine (f) the average propensity to save: To find the average propensity to save, divide saving by income. This results in an average propensity to consume of 0.1 (= $40/$400). 4.

Assume that the linear equation for consumption in a hypothetical private closed economy is C = 10 + 0.9Y, where Y is total real income (output). Also suppose that the equation for investment is Ig = Ig0 = 40, meaning that Ig is 40 at all levels of total real income.. Using the equation Y = C + Ig, determine the equilibrium level of Y. What are the total amounts of consumption, saving, and investment at equilibrium Y? Y ? 500,C ? 460,I g ? 40, S ? 40 To obtain these results, recognize that at equilibrium aggregate demand (C + Ig ) must equal Y which represents output. Therefore the solution for equilibrium Y is where: Y ? C ? 40 ? ?10 ? 9Y ?? 40 or Y ? 9Y ? 50 or Y ? 9Y ? 50, whichmeans that Y ? 500 From this wecan find C ? 10 ? 9?500?, which is 460 Since saving equals Investment at equilibrium, S = 40

5.

Assume that in a particular year the natural rate of unemployment is 5 percent and the actual rate of unemployment is 9 percent. Use Okun’s Law to determine the size of the GDP gap in percentage-points terms. If the nominal GDP is $500 billion in that year, how much output is being forgone because of cyclical unemployment? GDPgap=8per cent[ =( 9–5)´2] ;f or goneout put=$40bi l l i on( =8% of$500bi l l i on) .

6.

Suppose the full-employment level of real output (Q) for a hypothetical economy is $250 and the price level (P) initially is 100. Use the short-run aggregate supply schedules below to answer the questions which follow: AS (P100)

AS (P125) 3

AS (P75)

P 125 100 75 a.

Q 280 250 220

P 125 100 75

Q 250 220 190

P 125 100 75

Q 310 280 250

What will be the level of real output in the short-run if the price level unexpectedly rises from 100 to 125 because of an increase in aggregate demand? What if the price level falls unexpectedly from 100 to 75 because of a decrease in aggregate demand? Explain each situation, using numbers from the table. If the price level unexpectedly rises from 100 to 125 because of an increase in aggregate demand, then the level of real output increases from 250 to 280. If the price level unexpectedly falls from 100 to 75 because of a decrease in aggregate demand, then the level of real output decreases from 250 to 220. Since initial price is 100 so one will use the shot-run As (P100).

b.

What will be the level of real output in the long-run when the price level rises from 100 to 125? When it falls from 100 to 75? Explain each situation. When the price level rises from 100 to 125 than the AS(P100) schedule chages to AS(P125), where real output in the long-run remains constant at 250. And, when the price level falls from 100 to 75; which yields to an aggregate supply schedule AS(P75), then the level of real output in the long-run remains constant at 250.

c.

Show the circumstances described in parts a and b on graph paper, and derive the long-run aggregate supply curve. Below graph shows the lon run aggregate supply curve:

4

Real domestic output is represented on X axis and price level is represented on Y axis. AD is the aggregate demand curve and AS is the aggregate supply curve. 7.

The following equations describe an economy. Think of C, I, G, etc.,as being measured in billions and i as a percentage; a 5 percent interest rate implies i=5. C = 0.8(1 – t)Y t = 0.25 I = 900 – 50i G = 800 L = 0.25Y – 62.5i M/P = 500 a. b. c. d. e.

What is the equation that describe the IS curve? What is the general definition of the IS curve? What is the equation that describes the LM curve? What is the general definition of the LM curve? What are the equilibrium levels of income and the interest rate?

a) Y = C+I+G = 0.8(1-0.25)Y +900-50i +800 = 1700+0.6Y-50i 0.4Y = 1700-50i Y = (2.5)(1700-50i) => Multiplier = 2.5

IS is described as Y=4250-125i 5

b) In general, the IS (Investment & Savings) curve represents all combination points of the interest rate (i) and the output level (Y) where the expenditure sector is in an equilibrium. (actual output = intended spending) Ex. If the interest rate decreases, the investment spending increases  firms increase their output until it is equal to the intended spending. Expansive fiscal policy leads to the IS curve switching to the right. Contractive fiscal policy leads to the IS curve switching to the left.

c) L=M/P 0.25Y-62.5i=500 0.25Y=500+62.5i LM is described as Y=2000+250i

d) In general, the LM (Liquidity preference & Money supply) curve represents all combination points of the interest rate (i) and the output level (Y) where the money sector is in an equilibrium. (demand for real money balance = supply of real money balance). Ex. If the income increases, the demand for real money balances increases too. Given a fixed real money supply  interest rate increases until the money sector is in an equilibrium again. (Attention: Liquidity Trap)

e) IS ~ LM 4250-125i = 2000+250i 2250=375i i = 2250/375 = 6 Y = 4250-125i = 2000+250i = 2000+250•6 = 2000+1500 = 3500

8.

Suppose there is a decline in the demand for money. At each output level and interest rate the public now wants to hold lower real balances. 6

a.

In the Keynesian case, what happens to equilibrium output and to prices? A decrease in money demand lowers the interest rate and increases investment and thus income. The LM and AD curves shift to the right. Equilibrium output increases, but in the Keynesian case the price level stays the same since the AS curve is horizontal. Thus we have no real balance effect (because of a change in price level) and the LM curve does not shift back to the left.

b.

In the classical case, what is the effect on output and on prices? In the classical case, the AS curve is vertical, and thus the shift in the AD curve (caused by a shift in the LM curve) will not affect income. However, the price level will increase and this will reduce real money balances. The LM curve will shift back to its original position, and the interest rate will not be affected.

9.

A proposal for “100 percent banking” involves a reserve-deposit ratio of unity. Such a scheme has been proposed for the United States in order to enhance the Fed’s control over the money supply. a.

Indicate why such a scheme would help monetary control. Reser ver at i oofuni t ymeanst hatal l t hedeposi t swhatcomet ot hebankar ehel das ar eser ve.i nt hi sscenar i o,Bankswi l l nothav emoneyt ol endt ot hebor r ower . t hr ought hi sway ,Monet ar ycont r ol wi l l beex er ci sed.Lat eronFEDwi l l comeupwi t h t hepol i cyoncr edi tdi sbur sementandl oanoffer i ngs.

b.

Indicate what bank balance sheets would look like under this scheme. Undert hi sscheme,al l deposi t swi l l goi nLi abi l i t ysi deoft hebal ancesheetandl at er onal lt hedeposi t swi l l ber eflect edi ncashi nhand/bankonassetsi de.t hi sway , assetandl i abi l i t ysi dewi l lbebal anced.

c.

Under 100 percent banking, how would banking remain profitable? Under100% banki ng,Deposi t or swi l l bechar gedi nt er estr at et osaf eguar dand hol di ngt hei rmoneyandt hatwi l l bet hesour ceofi ncomef ort hebankssot hat banki ngwi l lcov ert hei rexpensesandr emai npr ofit abl e.

10.

You as chair of the Fed (congratulations!), are considering whether monetary base or the interest rate should be used as a target. What information do you need to have to make an informed decision? When would each be a good (or bad!) choice?

11.

Suppose the simplified consolidated balance sheet shown below is for the entire commercial banking system. All figures are in billions. The reserve ratio is 25 percent.

Assets

Liabilities and net worth 7

(1) Reserves Securities Loans

a.

(1)

$52 $48 $100

Demand deposits

$200

How much excess reserves does the commercial banking system have? What is the maximum amount the banking system might lend? Show in column 1 how the consolidated balance sheet would look after this amount has been lent. Whatis monetary multiplier? Required Reserves =25% x Checkable Deposits =.25 x 200 =50 billion Excess Reserves = Reserves – Required Reserves =52-50 = 2 billion Thus the excess reserves are 2 billion The maximum amount that the banking system might lend is calculated as follows: Amount= Money multiplier x Excess reserves 1/.25 x 2 billion =4x2 =8 billion Thus the maximun amount the banking can lend is 8 billion Column (1) Reserves = $52, Securities = $48, Loans = $108, Checkable deposits = $208; Money multiplier = 4

b.

Answer the questions in (a) assuming the reserve ratio is 20 percent. Explain the resulting difference in the lending ability of the commercial banking system. The reserve ratio is geven at 20 percent. Then the amount of excess reserves is calculated as follows: Required Reserves =20% x Checkeable Deposits =.20 x 200 =40 billion Excess Reserves = Reserves – Required Reserves =52-40 =12 billion 8

Thus the excess reserves are 12 billion. The maximun amount banking might lend is calculated as follows: Amount= Money multiplier x Excess reserves 1/.20 x 12 billion =5 x 12 billion =60 billion Column (1) Reserves = $52, Securities = $48, Loans = $160, Checkable deposits = $260; Money multiplier = 5

Assets

Liabilities and net worth (1)

Reserves Securities Loans

(1) Demand deposits

$52 $48 $100

9

$200...