Posted: September 16th, 2017

Homework # 5 Questions (Ch. 10~12). Total 40 points. EC2050-03&04 Principles of macroeconomics. Department of Economics

Homework # 5 Questions (Ch. 10~12). Total 40 points. EC2050-03&04 Principles of macroeconomics. Department of Economics

1. Assume that there is neither the government sector nor the foreign sector (private closed economy). Derive the multiplier algebraically, using general notations suggested in the textbook (You may need to go back to Ch. 9 Appendix for this question) (3 points).

2. Assume that there is private sector and the government sector. Assume further that the government imposes a lump-sum tax on income. Derive the multiplier algebraically, using general notations suggested in the textbook (3 points).

3. Assume that there is private sector and the government sector. Assume further that the government imposes this time a proportional tax on income. Derive the multiplier algebraically, using general notations suggested in the textbook (3 points).

4. Match each concept in Column A with a definition or example in Colum B (1 point for each).
Column A    Column B
a. Tax multiplier    1. Reduction in income tax rates
b. Disposable income    2. Unemployment compensation
c. Expansionary fiscal policy    3. Y- T + TR
d. Contractionary fiscal policy    4. G + TR
e. Government outlays    5. Reduction in government spending
f. Automatic stabilizer    6. Intended investment
g. Injection into the circular flow    7. – multipler * (mpc)

5. Match each concept in Column A with a definition or example in Colum B (1 point for each).
Column A    Column B
a. Excess reserves    1. The ease of use of an asset as a medium of exchange
b. Barter    2. A measure of the money supply that includes currency, checkable deposits, and traveler’s checks
c. Deflation    3. An institution such as a bank, savings and loan association, or life insurance company that accepts funds from savers and makes loans to borrowers
d. Required reserves    4. A good used as money that is also valuable commodity in itself
e. Liquidity    5. When the aggregate price level falls
f. Commodity money    6. A medium of exchange that is accepted as money because the government says it has value
g. Fiat money    7. A measure of the money supply that includes all of M1 plus savings deposits, small certificates of deposit, and retail money market funds
h. M1 money    8. Exchange of goods, services, or assets directly for other goods, without the use of money
i. M2 money    9. The portion of bank reserves that banks must keep on reserve
j. Financial intermediary    10. The portion of bank reserves that banks are permitted to lend to their customers
k. Expansionary monetary policy    11. The idea that changes in the money supply affect only prices, not output
l. Velocity    12. The Federal Reserve open market sale of bonds
m. Money neutrality    13. The number of times that a unit of money changes hands in a year

6. Suppose that the Fed makes an open market sale of $15 million in bonds to HIJ Bank (1 point for each).
(1) What is the effect on the Fed’s balance sheet?
(2) What is the initial effect on HIJ Bank’s balance sheet?
(3) Show in a graph the effect on the market for federal funds. (No numbers are necessary, for this or later sections of this question.)
(4) Assuming that the level of business confidence remains unchanged, show on a graph how this open market sale will change the level of intended investment.
(5) What is the effect on aggregate demand and output? Show on a carefully labeled graph.

7. Explain the following concepts in one paragraph with maximum three sentences (2 points for each)
(1) Quantitative easing (QE)
(2) Liquidity trap
(3) Credit rationing