A US2 trillion proposed spending by the US President Joe Biden

8. Consider the economy of Agrarian with a nominal GDP of $1 trillion, real GDP of $900 billion, and money supply of $50 billion. Agrarian’s central bank is independent from the rest of the government. Suppose commercial banks are required to maintain a reserve requirement of 20% of deposits. Assume that banks do not hold excess reserves. (Total marks = 12)

a)  Calculate the money multiplier for this economy. If the central bank wants to increase money supply by $1 billion using open-market operations, will it buy or sell? Explain. (2 marks)

b) Using the quantity theory of money, calculate the price level and the velocity of money in Agrarian’s economy prior to central bank action. Show your work. (2 marks)

c)  Assume that velocity is constant and real GDP increases by 5% each year. What will happen to nominal GDP and the price level next year if money supply does not change? Show your work. (2 marks)

d) In (c), what money supply should the central bank set next year to keep the price level unchanged? Show your work. (3 marks)

e)  In (c), what money supply should the central bank set next year if it wants inflation of 2%? Show your work. (3 marks)

Consider the economy of Agrarian with a nominal GDP of $1 trillion, real GDP of $900 billion, and money supply of $50 billion. Agrarian’s central bank is independent from the rest of the government. Suppose commercial banks are required to maintain a reserve requirement of 20% of deposits. Assume that banks do not hold excess reserves.

If net taxes exceed government expenditures, the government sector has a budget ________ and government saving is ________.

Select one:

a. balance that is zero / zero

b. surplus / positive

c. deficit / positive

d. surplus / negative

e. deficit / negative

Consider a small open economy with GDP of $800 billion, consumption of $400 billion, government expenditures of $100 billion, and investment of $200 billion. Which one best describes this economy?

Select one:

a. net exports are greater than zero, saving is greater than investment, and net capital outflow is greater than zero

b. net exports are greater than zero, saving is less than investment, and net capital outflow is greater than zero

c. net exports are greater than zero, saving is greater than investment, and net capital outflow is less than zero

d. net exports are less than zero, saving is greater than investment, and net capital outflow is greater than zero

e. net exports are less than zero, saving is less than investment, and net capital outflow is less than zero

Other factors constant, a depreciation of a nation’s currency may result from which of the following? 

Select one:

a. an increase in net exports

b. a decrease in net exports

c. a fall in national saving

d. a decrease in domestic demand for investment

e. Both B and D are correct.

Question 17

Suppose that purchasing power parity condition holds. If inflation in Mexico (foreign country) is 6% and inflation in Canada (home country) is 2%, what is expected to happen to the value of the peso (i.e., nominal exchange rate)? 

Select one:

a. depreciate by 6%

b. appreciate by 6%

c. appreciate by 4%

d. depreciate by 4%

e. depreciate by 2%

Question 18

When the real interest rate increases,

Select one:

a. the demand for loanable funds curve shifts leftward.

b. the supply of loanable funds curve shifts leftward.

c. there is a movement down along the supply of loanable funds curve.

d. there is a movement up along the supply of loanable funds curve.

e. the supply of loanable funds curve shifts rightward.

The supply curve of dollars shifts leftward if

Select one:

a. the price of Canadian goods and services decreases.

b. world interest rates fall.

c. the Canadian exchange rate rises.

d. Canadian interest rates rise.

e. none of the above

Question 14

When a country experiences capital flight, its interest rate ________ and the value of its currency _________. 

Select one:

a. falls by the amount of risk premium / depreciate

b. falls by the amount of risk premium / appreciate.

c. rises by the amount of risk premium / depreciate

d. rises by the amount of risk premium / appreciate

e. Both B and D are correct.

Question 15

Which of the following is the reason interest rate parity does not hold? 

Select one:

a. differences in tax rates between countries

b. concerns about default risk

c. differences in population size

d. differences in the level of gross domestic product

e. Both A and B are correct.