Take home Study Guide
#1- Draw an aggregate demand and supply diagram for
Japan. In the diagram, show how each of the following affects aggregate demand
and supply.
a. The U.S. gross domestic product falls.
b. The level of prices in Korea falls.
c. Labor receives a large wage increase.
d. Economists predict higher prices next year. #2- Use an aggregate demand and aggregate supply diagram to illustrate and
explain how each of the following will affect the equilibrium price level and real
GDP: a. Consumers expect a recession.
b. Foreign income rises.
c. Foreign price levels fall.
d. Government spending increases.
e. Workers expect higher future inflation and
negotiate higher wages now.
f. Technological improvements increase productivity. #3- Fill in the blanks in the following table:
Income Consumption Saving MPC
$1,000 $ 400 $2,000 $ 900 $3,000 $1,400 $4,000 MPS APC APS
.60 $1,100
.50
$2,100 #4- What is the level of saving if:
a. Disposable income is $500 and consumption is $450?
b. Disposable income is $1,200 and the APS is .9?
c. The MPC equals .9, disposable income rises from $800 to $900, and
saving is originally $120 when income equals $800? #5- What is the marginal propensity to consume if:
a. Consumption increases by $75 when disposable Income rises by $100?
b. Consumption falls by $50 when disposable income falls by $100?
c. Saving equals $20 when disposable income equals $100 and saving
equals $40 when disposable income equals $300? #6- Draw a diagram and illustrate the effects of the following on the net exports
function for the United States:
a. The French government imposes restrictions on French
imports of U.S. goods.
b. The U.S. national income rises.
c. Foreign income falls.
d. The dollar depreciates on the foreign exchange market. #7- What is the MPC?
#8- What is the MPI?
#9- What is the MPS?
#10- What is the multiplier?
#11- What is the equilibrium level of real GDP?
#12- What is the value of autonomous consumption?
#13- If government spending increases by $15, what is the new equilibrium level
of real GDP?
#15- What are the equations for the consumption, net exports, and aggregate
expenditures functions?
#16- The following exercises are based on the appendix to this chapter. Answer
exercises A-D on the basis of the following information. Assume that equilibrium
real GDP is $800 billion, potential real GDP is $900 billion, the MPC is .80, and
the MPI is .40.
a) What is the size of the GDP gap?
b) How much must government spending increase to eliminate the GDP
gap?
c) How much must taxes fall to eliminate the GDP gap? d) If government spending and taxes both change by the same amount,
how much must they change to eliminate the recessionary gap?
17- Suppose the MPC is .90 and the MPI is .10. If government expenditures go up
$100 billion while taxes fall $10 billion, what happens to the equilibrium level of
real GDP? 18- Use the following equations for exercises A-C
C=$100 + .8y
I=$200
G=$250
X=$100 – .2Y
a) What is the equilibrium level of real GDP?
b) What is the new equilibrium level of real GDP if government
spending increases by $150?
c) What is the new equilibrium level of real GDP if government
spending and taxes both increase by $150? #19- Yesterday Bank A had no excess reserves. Today it received a new deposit of
$4,000.
a. If the bank maintains a reserve requirement of 2 percent, what is
the maximum loan that Bank A can make?
b. What is the maximum amount by which the money supply can be
increased as a result of Bank A’s new loan? 20- Suppose the banking system has vault cash of $1,000, deposits at the Fed of
$2,000, and demand deposits of $10,000.
a. If the reserve requirement is 20 percent, what is the maximum potential
increase in the money supply, given the banks’ reserve position?
b. If the Fed now purchases $100 worth of government bonds from private
bond dealers, what are the excess reserves of the banking system?
(Assume that the bond dealers deposit the $100 in demand deposits.) How
much can the banking system increase the money supply, given the new
reserve position? 21- Based on the following data, compute (a) the unemployment rate, (b) the
structural unemployment rate, (c) the cyclical unemployment rate. Frictional
unemployment rate = 2 percent; Natural unemployment = 5 percent; Civilian labor
force = 100 million; Number of employed persons = 82 million
22- In 1999, the Canadian economy was at full employment. Real GDP was $886
billion, the nominal interest rate was around 6 percent per year, the inflation rate
was 2 percent a year, the price level was 110, and the velocity of circulation was
constant at 10. a. What is the real interest rate? b. If the real interest rate remains
unchanged when the inflation rate increases to 4 percent a year, explain how the
nominal interest rate changes. c. What was the quantity theory of money in
Canada? d. If the quantity of money grows at a rate of 10 percent a year and
potential GDP grows at 3 percent a year, what is the inflation rate in the long run? 23- The national income accounts of Parchment Paradise are kept on parchment.
A fire destroyed the national statistics office, and the national income and product
accounts are now incomplete. But they contain the following information for
2002: Net domestic product at factor cost was $4,350; consumption expenditure
was $3,000; indirect taxes less subsidies was $120; net interest was $300; rental
income of persons was $150; investment was $1200; government purchases of
goods and services were $1200; proprietor’s income were $300; compensation of
employees was $3,000; exports were $400; and imports were $700. You’ve been hired as an economist to reconstruct the missing numbers by calculating for 2002:
a. GDP. b. Corporate profits. c. Capital consumption allowance.
24- Suppose you are a member of the FOMC and the U.S. economy is entering a
recession. Write a directive (3 typed pages) to the committee about the conduct
of monetary policy over the next two months. At the meeting, the committee will
respond to changes in economic prospects as needed to support the attainment
of its objectives. Your directive may address a target for the rate of growth of the
M2 money supply, the federal funds rate, the rate of inflation, and the foreign
exchange value of the dollar versus the Chinese Yuan and the Euro. Be sure to
make specific proposals. Indicate why your recommendations will work. You may
submit your paper to your instructor. You may use the following sources: (1) Fed
Chairman Bernanke’s past economic report to congress (http://www.ny.frb.org/);
(2) You can be Chairman of the Federal Reserve System (economics website); (3)
Chapter 14, Monetary Policy (Textbook, Boyes & Melvin); (4) LaGuardia Economics
website: http://www.laguardia.edu/economics/
Japan. In the diagram, show how each of the following affects aggregate demand
and supply.
a. The U.S. gross domestic product falls.
b. The level of prices in Korea falls.
c. Labor receives a large wage increase.
d. Economists predict higher prices next year. #2- Use an aggregate demand and aggregate supply diagram to illustrate and
explain how each of the following will affect the equilibrium price level and real
GDP: a. Consumers expect a recession.
b. Foreign income rises.
c. Foreign price levels fall.
d. Government spending increases.
e. Workers expect higher future inflation and
negotiate higher wages now.
f. Technological improvements increase productivity. #3- Fill in the blanks in the following table:
Income Consumption Saving MPC
$1,000 $ 400 $2,000 $ 900 $3,000 $1,400 $4,000 MPS APC APS
.60 $1,100
.50
$2,100 #4- What is the level of saving if:
a. Disposable income is $500 and consumption is $450?
b. Disposable income is $1,200 and the APS is .9?
c. The MPC equals .9, disposable income rises from $800 to $900, and
saving is originally $120 when income equals $800? #5- What is the marginal propensity to consume if:
a. Consumption increases by $75 when disposable Income rises by $100?
b. Consumption falls by $50 when disposable income falls by $100?
c. Saving equals $20 when disposable income equals $100 and saving
equals $40 when disposable income equals $300? #6- Draw a diagram and illustrate the effects of the following on the net exports
function for the United States:
a. The French government imposes restrictions on French
imports of U.S. goods.
b. The U.S. national income rises.
c. Foreign income falls.
d. The dollar depreciates on the foreign exchange market. #7- What is the MPC?
#8- What is the MPI?
#9- What is the MPS?
#10- What is the multiplier?
#11- What is the equilibrium level of real GDP?
#12- What is the value of autonomous consumption?
#13- If government spending increases by $15, what is the new equilibrium level
of real GDP?
#15- What are the equations for the consumption, net exports, and aggregate
expenditures functions?
#16- The following exercises are based on the appendix to this chapter. Answer
exercises A-D on the basis of the following information. Assume that equilibrium
real GDP is $800 billion, potential real GDP is $900 billion, the MPC is .80, and
the MPI is .40.
a) What is the size of the GDP gap?
b) How much must government spending increase to eliminate the GDP
gap?
c) How much must taxes fall to eliminate the GDP gap? d) If government spending and taxes both change by the same amount,
how much must they change to eliminate the recessionary gap?
17- Suppose the MPC is .90 and the MPI is .10. If government expenditures go up
$100 billion while taxes fall $10 billion, what happens to the equilibrium level of
real GDP? 18- Use the following equations for exercises A-C
C=$100 + .8y
I=$200
G=$250
X=$100 – .2Y
a) What is the equilibrium level of real GDP?
b) What is the new equilibrium level of real GDP if government
spending increases by $150?
c) What is the new equilibrium level of real GDP if government
spending and taxes both increase by $150? #19- Yesterday Bank A had no excess reserves. Today it received a new deposit of
$4,000.
a. If the bank maintains a reserve requirement of 2 percent, what is
the maximum loan that Bank A can make?
b. What is the maximum amount by which the money supply can be
increased as a result of Bank A’s new loan? 20- Suppose the banking system has vault cash of $1,000, deposits at the Fed of
$2,000, and demand deposits of $10,000.
a. If the reserve requirement is 20 percent, what is the maximum potential
increase in the money supply, given the banks’ reserve position?
b. If the Fed now purchases $100 worth of government bonds from private
bond dealers, what are the excess reserves of the banking system?
(Assume that the bond dealers deposit the $100 in demand deposits.) How
much can the banking system increase the money supply, given the new
reserve position? 21- Based on the following data, compute (a) the unemployment rate, (b) the
structural unemployment rate, (c) the cyclical unemployment rate. Frictional
unemployment rate = 2 percent; Natural unemployment = 5 percent; Civilian labor
force = 100 million; Number of employed persons = 82 million
22- In 1999, the Canadian economy was at full employment. Real GDP was $886
billion, the nominal interest rate was around 6 percent per year, the inflation rate
was 2 percent a year, the price level was 110, and the velocity of circulation was
constant at 10. a. What is the real interest rate? b. If the real interest rate remains
unchanged when the inflation rate increases to 4 percent a year, explain how the
nominal interest rate changes. c. What was the quantity theory of money in
Canada? d. If the quantity of money grows at a rate of 10 percent a year and
potential GDP grows at 3 percent a year, what is the inflation rate in the long run? 23- The national income accounts of Parchment Paradise are kept on parchment.
A fire destroyed the national statistics office, and the national income and product
accounts are now incomplete. But they contain the following information for
2002: Net domestic product at factor cost was $4,350; consumption expenditure
was $3,000; indirect taxes less subsidies was $120; net interest was $300; rental
income of persons was $150; investment was $1200; government purchases of
goods and services were $1200; proprietor’s income were $300; compensation of
employees was $3,000; exports were $400; and imports were $700. You’ve been hired as an economist to reconstruct the missing numbers by calculating for 2002:
a. GDP. b. Corporate profits. c. Capital consumption allowance.
24- Suppose you are a member of the FOMC and the U.S. economy is entering a
recession. Write a directive (3 typed pages) to the committee about the conduct
of monetary policy over the next two months. At the meeting, the committee will
respond to changes in economic prospects as needed to support the attainment
of its objectives. Your directive may address a target for the rate of growth of the
M2 money supply, the federal funds rate, the rate of inflation, and the foreign
exchange value of the dollar versus the Chinese Yuan and the Euro. Be sure to
make specific proposals. Indicate why your recommendations will work. You may
submit your paper to your instructor. You may use the following sources: (1) Fed
Chairman Bernanke’s past economic report to congress (http://www.ny.frb.org/);
(2) You can be Chairman of the Federal Reserve System (economics website); (3)
Chapter 14, Monetary Policy (Textbook, Boyes & Melvin); (4) LaGuardia Economics
website: http://www.laguardia.edu/economics/
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