Review of Exam Two 201 1 National saving is the sum of and In a closed economy it is equal to in equilibrium 2 Public saving is the difference between and 3 Congress and the President implement an investment tax credit Which curve in the market for loanable funds shifts which direction does it shift and what happens to the interest rate 4 When tax code changes reduce saving incentives the interest rate will and investment will 5 Using a graph representing the market for loanable funds show and explain what happens to interest rates and investment if the government budget goes from a deficit to a surplus Page 1 Review of Exam Two 201 6 Suppose a bank has 3 000 in reserves 25 000 of deposits and a 10 percent reserve requirement What is the amount of excess reserves 7 The money multiplier is when the reserve ratio is 12 5 percent 8 When the Fed purchases government bonds the money supply and the federal funds rate 9 List two reasons why the Fed can not control the exact size of the money supply 10 If the reserve ratio is 20 percent how much money can be created from 100 of reserves Show your work 11 Suppose that in a country the total holdings of banks were as follows required reserves 45 million excess reserves 15 million deposits 750 million loans 600 million Page 2 Review of Exam Two 201 Treasury bonds 90 million Show that the balance sheet balances if these are the only assets and liabilities 12 According to the quantity theory of money an increase in the money supply causes the price level to and the value of money to 13 The classical dichotomy says that two groups of variables are affected by different forces What are these two groups of variables 14 Money neutrality states that a change in the money supply affects variables only Most economists believe that money neutrality is a good description of how money affects the economy in the 15 If velocity is 6 real output is 10 000 and M is 20 000 what would the price level be If M increases to 25 000 but V and Y do not change what happens to the price level Are the change in the money supply and the change in the price level proportional Page 3 Review of Exam Two 201 16 A country had a net capital outflow of 1 5 trillion and imports of 0 5 trillion What was the value of its exports 17 A country recently had 800 billion worth of domestic investment and its residents purchased 400 billion worth of foreign assets If foreigners purchased 100 billion of this country s assets what was this country s saving Explain how your found your answer 18 A certain cell phone sells for 2400 yuan in China and for 300 in the U S The nominal exchange rate is 6 5 yuan per dollar A Find the real exchange rate Show your work B In terms of dollars where is the cell phone cheaper 19 What happens to each of the following if the supply of loanable funds shifts right A the interest rate B net capital outflow C the exchange rate Budget in Recession During a recession government revenues from the income tax fall and government transfers rise as the reduction in Page 4 Review of Exam Two 201 income and the rise in unemployment raise the number of people who qualify for benefits 20 Refer to Budget in Recession This change in the deficit causes the exchange rate to change What does the change in the exchange rate do to net exports Budget Reform Due to concerns about a rising level of debt relative to GDP Congress and the President cut expenditures and raise taxes 21 Refer to Budget Reform What does this policy change do to net capital outflows Defend your answer 22 How are the identities S NCO I and NCO NX related to the foreign currency exchange market and the loanable funds market 23 Suppose that U S citizens start saving more What does this imply about the supply of loanable funds and the equilibrium real interest rate What happens to the real exchange rate Page 5 Review of Exam Two 201 Answer Key 1 private saving public saving investment public saving private saving investment 2 tax revenue government purchases government purchases tax revenue 3 The demand for loanable funds shifts right The interest rate rises 4 rise decrease 5 As shown in the graph below the economy starts in equilibrium at point E0 with interest rate r0 and equilibrium quantity of saving and investment at q0 If the government succeeds in obtaining a surplus there will be more public saving in the economy and so more national saving at each interest rate and the supply of loanable funds curve will shift from S0 to S1 The new equilibrium will be at E1 with a lower interest rate r1 and a higher quantity of saving and investment q1 Hence if the federal government succeeds in having a surplus interest rates will fall and investment will increase Market for Loanable Funds 6 500 7 8 8 increases decreases 9 1 The Fed can not control how much money households deposit at banks 2 The Fed does not control how much banks lend These two facts mean the Fed does not have perfect precision in controlling the money supply 10 1 20 100 500 11 The only liability is deposits which equal 750 million Total reserves are 60 billion which summed with loans 600 million and Treasury bonds 90 million 750 Since liabilities equal assets the balance sheet balances Page 6 Review of Exam Two 201 12 increase fall 13 nominal variables and real variables 14 nominal long run 16 2 trillion 15 P MV Y With the numbers given P 12 When the money supply increases to 25 000 P increases to 15 Yes both the money supply and the price level rise by 25 17 This country had saving of 1 100 billion In an open economy saving equals domestic investment plus net capital outflow This country s domestic investment was 800 and its net capital outflow was 400 billion 100 billion 300 billion 800 billion 300 billion 1 100 billion 18 The real exchange rate 300 x 6 5 2400 1950 2400 8125 The real exchange rate is less than 1 The cell phone is cheaper in the U S 19 The interest rate falls net capital outflow rises the exchange rate falls 20 Because the exchange rate rises net exports fall 21 Net capital outflows rise because a lower interest rate in the U S makes U S assets less desirable So U S residents will purchase more foreign assets and foreign residents will purchase fewer U S assets 22 S is national saving which is the source of supply in the loanable funds market NCO I is net capital outflow plus domestic investment which is the source of demand in the loanable funds market NCO is the source of supply in the foreign currency exchange market NX
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