Explore BrainMass
Share

the money supply of the whole economy

This content was STOLEN from BrainMass.com - View the original, and get the already-completed solution here!

Please see attachment.

Hello, I am having a huge test on Monday and these are a couple of practice questions in a study packet that resemble the questions on the test. I understand some aspects but I have trouble tying them all together to come to the right solution. Can someone please help me with thorough explanations and solutions to these problems?
1. Assume that the officials in Ecoland have compiled the following information about their economy for last year:
Y = 10,000

C = 6,000
T = 1,500
G = 1,700
The government uses the following equation for the investment function:
I = 3,300 - 100r
Where r = equal to Ecoland's real interest rate.
Calculate, then explain, the following:
. Private saving
. Public saving
. National saving
. Investment
. The equilibrium real interest rate

2. What is the effect of an increase in the quantity of money? What is the difference between real variables and nominal variables? Are these variables affected by the quantity of money? If so, how? Use examples from the text, the South University Online Library, or the Internet when answering this question.

3. What is the difference between the real exchange rate and the nominal exchange rate? If the nominal exchange rate goes from 120 to 160 pesos per dollar, what has happened to the value of a dollar? Use examples from the text and/or the internet when responding to this question.

4. Assume that the Bank of Ecoville has the following balance sheet and the Fed has a 10% reserve requirement in place:
BALANCE SHEET FOR ECOVILLE INTERNATIONAL BANK
ASSETS LIABILITIES
Cash $33,000 Demand deposits $99,000
Loans $66,000
Now assume that the Fed lowers the reserve requirement to 8%.
I. What is the maximum amount of new loans that this bank can make?
II. Assume that the bank makes these loans. What will the new balance sheet look like?
III. By how much has the money supply increased or decreased?

© BrainMass Inc. brainmass.com October 25, 2018, 3:10 am ad1c9bdddf
https://brainmass.com/economics/international-investment/money-supply-whole-economy-329696

Attachments

Solution Preview

1. Before beginning, note that the equations had some typographical errors in them and were unclear. You should be able to follow what I am doing anyway. First of all, it is important to realize that we are assuming a closed economy. Then, Y=C+I+G+NX = C+I+ G since NX=0. Then, we may begin by solving for investment since we know the values of the other quantities. I= Y-C - G. I think something is wrong with your equations but if you correct them, I am happy to help you with this computation. Now, I= 3300 - 100r. Solving for r, gives you the interest rate while I is National Saving, which is the same as investment. National Saving is the sum of private and public saving.

We can calculate these as follows:

We introduce a new variable into the equation: (Y − T − C) + (T − G) = I .

Additional Info:
The calculation may be done as follows: I=Y-C-G. This implies that 3300 - 100r = 10,000-6000 - 1700= 2300. Then 3300r -100r = 2300. Thus -100r =-1000 and r=10. Now, we have T=1500. then (Y − T − C) + (T − G) = I .

The first of these terms is private savings and the second is public. Thus, private saving = Y-T-C = 10000 - 1500 -6000=2500. Public Savings = (T-G)= 1500 - 1700 = -200. This means that the ...

Solution Summary

Changes in the money supply of the whole economy within this case are noted.

$2.19
See Also This Related BrainMass Solution

What are the uses of money and how do banks create money?

Week 3: Discussion Questions

1 What are the uses of money and how do banks create money?
2. Is monetary policy conducted independently in the US and is the intended effect always achieved? Why or why not?
3. What is the difference between contractionary and expansionary monetary policy? What are the pros and cons of using expansionary and contractionary monetary policy tools under the following scenarios; depression, recession, and robust economic growth? Which do you think is more appropriate today?
4. What happens to the money supply, interest rates, and the economy in general if the Federal Reserve is a net seller of government bonds? Then describe what happens to the money supply, interest rates, and the economy in general if the Federal Reserve is a net buyer of government bonds. How do these policies impact the firm or industry you work in?
5. What are the advantages and disadvantages of adjustable-rate versus fixed-rate mortgages? Identify the conditions that should exist that make adjustable and fixed-rate mortgages favorable to lenders and borrowers. Which would you suggest for a homebuyer at this time? Explain.
6. In the early 1990s, Argentina stopped increasing the money supply and fixed the exchange rate of the Argentine austral at 10,000 to the dollar. It then renamed the Argentine currency the "peso" and cut off four zeros so that one peso equaled one dollar. Inflation slowed substantially. After this was done, the following observations were made. Explain why these observations did not surprise economists.
1. The golf courses were far less crowded.
2. The price of goods in dollar-equivalent pesos in Buenos Aires, the capital of the country, was significantly above that in New York City.
3. Consumer prices-primarily services-rose relative to other goods.
4. Luxury auto dealers were shutting down.

7. Explain how Franklin D. Roosevelt's statement "We have nothing to fear but fear itself" pertains to macroeconomic policy.
8. How do automatic stabilizers work? How can they slow an economic recovery?

9. The Fed wants to increase the money supply (which is currently 4,000) by 200. The money multiplier is 3 and people hold no cash. For each 1 percentage point the discount rate falls, banks borrow an additional 20. Explain how the Fed can achieve its goals using the following tools:
a. Change the reserve requirement.
2. Change the discount rate.
3. Use open market operations.

10. Suppose the price of a one-year 10 percent coupon bond with a $100 face value is $98.
1. Are market interest rates likely to be above or below 10 percent? Explain.
2. What is the bond's yield or return?
3. If market interest rates fell, what would happen to the price of the bond?

View Full Posting Details