Econtwo Exercise 2 Answers

ECONTWO: EXERCISE 2

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SECTION: ____________ 

 _______________________________________________________  ___________________________ _________________________________________________  _____________________  1. If excess reserves are zero and the BSP increases the re!ired reserve ratio fro" # $ercent to 1% $ercent& then the "one' "one ' "!(ti$(ier )increases& decreases* decreases fro" 20 to 10. +. If the re!ired reserve ratio is , $ercent& -ans do not ho(d excess reserves& and $eo$(e do not ho(d c!rrenc'& then /hen the 0ed $!rchases +% "i((ion of 2overn"ent 2 overn"ent -onds& -an reserves )increase& decrease* increase  -' $20 million and the "one' s!$$(' event!a((' )increases& decreases* increases  -' $250 million . 3. If the reserve ratio is 1# $ercent& and -ans do not ho(d excess reserves& and $eo$(e ho(d on(' de$osits and no c!rrenc'& then /hen the 0ed se((s 4# "i((ion /orth of -onds to the $!-(ic&  -an reserves )increase& decrease* decrease  -' $65 million and the "one' s!$$(' event!a((' )increases& decreases* decreases  -' $4333 million 5. An increase in the disco!nt rate /i(( )increase& decrease* decrease -an -orro/in2s fro" the centra( -an& )increase& decrease* decrease  -an reserves& and )increase& decrease* decrease "one' s!$$('. #. A decrease in the disco!nt rate /i(( /i(( )increase& decrease* increase -an -orro/in2s fro" the centra( -an& )increase& decrease* increase  -an reserves& and )increase& decrease* increase the "one' s!$$('. 4. An increase in the interest interest rate $aid -' the centra( -an on -an reserves /i(( )increase& decrease* increase the excess reserves of -ans& )increase& decrease* increase the reserve ratio of -ans& and )increase& decrease* decrease "one' s!$$('. 6. A decrease in the interest rate $aid -' - ' the centra( -an on -an reserves /i(( )increase& decrease* decrease  the excess reserves of -ans& )increase& decrease* decrease the reserve ratio of -ans& and )increase& decrease* increase "one' s!$$('. II !one" #ro%& and In'la%ion

1.If M  7  7 3&%%%& P  7  7 +& and Y  7  7 1+&%%%& then the ve(ocit' of "one' is e!a( to ( +. Based on the ass!"$tions of the !antit' e!ation& if M  7  7 1%%& V  7  7 3& and Y  7  7 +%%& then P  7  7 1 %% $ercent increase* and  is a 15 and no"ina( 89P 7 300. If M increases to +%% )a 1%% constant& then rea( 89P& Y, /i(( -e e!a( to 200& the $rice (eve( P  /i((  /i(( increase to 3 or a 100  $ercent increase and no"ina( 89P /i(( -e e!a( to 600 or a 100 $ercent increase. 3. If the no"ina( interest rate is 6 $ercent and ex$ected inf(ation is 5.# $ercent& then the ex$ected rea( interest rate is 25 $ercent. 5. If the rea( interest rate is 4 $ercent and the $rice (eve( is fa((in2 at a rate of + $ercent& the no"ina( interest rate is 4 $ercent.

#. ;o! $!t "one' into an acco!nt that earns a , $ercent no"ina( interest rate. The inf(ation rate is 3 $ercent& and 'o!r "ar2ina( tax rate is +# $ercent. 3 )ercen% III O)en Econom" !acroeconomics: *asic Conce)%s 1. If do"estic residents of Ita(' $!rchase 1.+ -i((ion e!ros of forei2n assets and forei2ners $!rchase 1.#  -i((ion e!ros of Ita(ian assets& then Ita('?s net ca$ita( o!tf(o/ is +3 ,illion e!ros& ca$ita( is f(o/in2 )into& o!t of* in%o Ita(' and the co!ntr' "!st have a )trade s!r$(!s& trade deficit* %rade de'ici% e!a( to 3 ,illion e!ros. 9o"estic invest"ent&  I, in Ita(' "!st -e )2reater& (ess* -rea%er than nationa( savin2 and tota( do"estic s$endin2 ) C+I+G* "!st -e )2reater& (ess* -rea%er than inco"e Y. +. If a co!nt' has +# -i((ion e!ros of i"$orts& 1# -i((ion e!ros of ex$orts& and se((s +% -i((ion e!ros of assets to forei2ners& ho/ "an' forei2n assets do do"estic residents $!rchase> 10 ,illion e.ros 3. Ann& a @.S. citizen& -!'s e!ros fro" a @S "one' chan2er to $!rchase a -ond iss!ed -' a S$anish co"$an'. This transaction )increases& decreases& does not chan2e* does no% c&an-e @S net ca$ita( o!tf(o/. 5. If a -!she( of /heat costs 4.5% in the @nited States& costs 5% $esos in Mexico& and the no"ina( exchan2e rate is 1% $esos $er do((ar& then the rea( exchan2e rate is 160 -!she(s of Mexican /heat  $er -!she( of @S /heat. @S /heat is )chea$er& "ore ex$ensive* more e/)ensie than Mexican /heat. #. S!$$ose that the no"ina( exchan2e rate is ,% 'en $er do((ar& that the $rice of a -aset of 2oods in the @.S. is #%%& and the $rice of a -aset of 2oods in a$an is #%&%%% 'en. S!$$ose that these va(!es chan2e to 1%% 'en $er do((ar& 4%%& and 6%&%%% 'en. Then the @S rea( exchan2e rate /o!(d )de$reciate& a$$reciate* a))recia%e. This /o!(d ca!se @S net ex$orts to )increase& decrease* decrease I  !acroeconomic T&eor" o' %&e O)en Econom" 1. A co!ntr' has nationa( savin2 of 6% -i ((ion& 2overn"ent ex$endit!res of +% -i((ion& do"estic invest"ent of 3%  -i((ion& and net ca$ita( o!tf(o/ of 5% -i((ion. $0 ,illion +. A co!ntr' has nationa( savin2 of 4% -i((ion& 2overn"ent ex$endit!res of 3% -i((ion& do"estic invest"ent of 5%  -i((ion& and net ca$ita( o!tf(o/ of +% -i((ion. $60 ,illion 3. A co!ntr' has do"estic invest"ent of 1%% -i((ion. Its citizens $!rchase #%% -i((ion of forei2n assets and forei2n citizens $!rchase 3%% -i((ion of its assets. $300 ,illion 5. A co!ntr' has I 7 +%% -i((ion& S 7 5%% -i((ion& and $!rchased 4%% -i((ion of forei2n assets& ho/ "an' of its assets did forei2ners $!rchase> $400 ,illion #.*ad .es%ion T&e s&i'% in %&e demand c.re 'or )esos %o %&e ri-&% or %o %&e le'% de)ends on "o.r anser %o %&e )reio.s ,lans W&e%&er ne% e/)or%s increased or decreased7 In the o$en econo"' "acroecono"ic "ode(& the a"o!nt of $esos )de"anded& s!$$(ied* demanded in the "aret for forei2n=c!rrenc' exchan2e at a 2iven rea( exchan2e rate increases if Phi(i$$ine ex$orts )increase& decrease* increase or Phi(i$$ine i"$orts )increase& decrease* decrease. In this case& the )de"and & s!$$('* demand c!rve for $esos shifts to the )ri2ht& (eft* ri-&%

4.)*ad .es%ion T&e s&i'% in %&e s.))l" c.re 'or )esos %o %&e ri-&% or %o %&e le'% de)ends on "o.r anser %o %&e )reio.s ,lans W&e%&er ne% ca)i%al o.%'lo increased or decreased7 In the o$en econo"' "acroecono"ic "ode(& the a"o!nt of $esos )de"anded& s!$$(ied* s.))lied  in the "aret for forei2n=c!rrenc' exchan2e at a 2iven rea( exchan2e rate increases if Phi(i $$ine net ca$ita( o!tf(o/ )increases& decreases* increases . In this case& the )de"and & s!$$('* s.))l" c!rve for $esos shifts to the )ri2ht& (eft* ri-&%. 6. In the o$en=econo"' "acroecono"ic "ode(& i f the s!$$(' of (oana-(e f!nds increases& the s!$$(' c!rve of (oana-(e f!nds shifts to the )ri2ht& (eft* ri-&%8 interest rates /i(( )rise& fa((* 'all& net ca$ita( o!tf(o/ /i(( )increase& decrease* increase & s!$$(' of $esos /i(( )increase& decrease* increase& the s!$$(' c!rve of $esos shifts to the)ri2ht& (eft* ri-&%8 the $eso )a$$reciates& de$reciates* de)recia%es  and net ex$orts )increase& decrease* increase . ,. In the o$en=econo"' "acroecono"ic "ode(& i f the s!$$(' of (oana-(e f!nds decreases& the s!$$(' c!rve of (oana-(e f!nds shifts to the )ri2ht& (eft* le'%8 interest rates /i(( )rise& fa((* rise& net ca$ita( o!tf(o/ /i(( )increase& decrease* decrease& s!$$(' of $esos /i(( )increase& decrease* decrease & the s!$$(' c!rve of $esos shifts to the)ri2ht& (eft* le'%8 the $eso )a$$reciates& de$reciates* a))recia%es  and net ex$orts )increase& decrease* decrease. . *ad .es%ion nser de)ends on &a% %&e so.rce is o' %&e increase in demand I' ines%men%8 %&e demand c.re ill s&i'% %o %&e ri-&% ,.% %&e NCO c.re ill no% s&i'% %o %&e ri-&%7 In the o$en=econo"' "acroecono"ic "ode(& if the de"and for ( oana-(e f!nds increases& the de"and c!rve of (oana-(e f!nds shifts to the )ri2ht& (eft* ri-&%8  interest rates /i(( )rise& fa((* rise& net ca$ita( o!tf(o/ c!rve /i(( shift to the )ri2ht& (eft* ri-&%& s!$$(' of $esos /i(( )increase& decrease* increase& the s!$$(' c!rve of $esos shifts to the)ri2ht& (eft* ri-&%8 the $eso )a$$reciates& de$reciates* de)recia%es  and net ex$orts )increase& decrease* increase. 1%. *ad .es%ion nser de)ends on &a% %&e so.rce is o' %&e decrease in demand I' ines%men%8 %&e demand c.re ill s&i'% %o %&e le'% ,.% %&e NCO c.re ill no% s&i'% %o %&e le'%7 In the o$en=econo"' "acroecono"ic "ode(& if the de"and for ( oana-(e f!nds decreases& the de"and c!rve of (oana-(e f!nds shifts to the )ri2ht& (eft* le'%8 interest rates /i(( )rise& fa((* 'all& net ca$ita( o!tf(o/ c!rve /i(( shift to the )ri2ht& (eft* le'% & s!$$(' of $esos /i(( )increase& decrease* decrease & the s!$$(' c!rve of $esos shifts to the)ri2ht& (eft* le'%8 the $eso )a$$reciates& de$reciates* a))recia%es  and net ex$orts )increase& decrease* decrease . 11. An increase in the 2overn"ent -!d2et deficit /i(( ca!se the )de"and& s!$$('* s.))l"  c!rve of (oana-(e f!nds to shift to the )ri2ht& (eft* le'%8 rea( interest rates /i(( )rise& fa((* rise8 net ca$ita( o!tf(o/ /i(( )increase& decrease* decrease &the s!$$(' of $esos in the forei2n exchan2e "aret /i(( )increase& decrease* decrease & the s!$$(' c!rve of $esos shifts to the )ri2ht& (eft* le'%8 the $eso )a$$reciates& de$reciates* a))recia%es  and net ex$orts )increase& decrease* decrease.