HW3 answers - Name: _ SID: _ Discussion Section: _ Problem...

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Problem Set #3 (Spring 2008) 1/8 Name: _______________________ SID: _______________________ Discussion Section: _______________________ Problem Set #3 ANSWERS Due Tuesday, March 18, 2008 Problem Sets MUST be word-processed except for graphs and equations. When drawing diagrams, the following rules apply: 1. Completely , clearly and accurately label all axes, lines, curves, and equilibrium points. 2. The original diagram and any equilibrium points MUST be drawn in black or pencil. 3. The first change in any variable, curve, or line and any new equilibrium points MUST be drawn in red. 4. The second change in any variable, curve, or line and any new equilibrium points MUST be drawn in blue. 5. The third change in any variable, curve, or line and any new equilibrium points MUST be drawn in green. 6. The fourth change in any variable, curve, or line and any new equilibrium points MUST be drawn in brown.
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Problem Set #3 (Spring 2008) 2/8 QUESTIONS A. Multiple Choice Questions . Circle the letter corresponding to the best answer. (1 points each.) 1. An increase in expected inflation is likely to cause: a. A decline in the demand for real money balances. b. An increase in the demand for real money balances. c. No change in the demand for real money balances. d. No change in the demand for real money balances only if the income elasticity of real money demand is zero. 2. If there is a financial panic and increased uncertainty about the returns in the stock market and bond market, what is the likely effect on money demand? a. Money demand declines first, then rises when inflation increases. b. Money demand rises. c. The overall effect is ambiguous. d. Money demand declines. 3. If the income elasticity of real money demand is 0.75 and income increases by 8%, by about how much does the price level change when the asset market is in equilibrium? a. Falls by 6%. b. Unchanged. c. Rises by 6%. d. Rises by 8%. 4. A decrease in the effective tax rate on capital would cause the IS curve to: a. Shift to the right. b. Shift to the left. c. Remain unchanged. d. Remain unchanged if taxes are fully deductible from income; otherwise, shift to the right. 5. Banks decide to increase the interest rate they pay on checking accounts from 1% to 2%. This action would: a. Increase money demand, shifting the LM curve to the left. b. Increase money demand, shifting the LM curve to the right. c. Decrease money demand, shifting the LM curve to the left. d. Decrease money demand, shifting the LM curve to the right.
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Problem Set #3 (Spring 2008) 3/8 6. You have just read that the Federal Reserve has increased the money supply to avoid a recession. For a given price level, you would expect the LM curve to: a. Shift to the left as the real money supply falls. b.
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This note was uploaded on 04/01/2008 for the course ECON 100B taught by Professor Wood during the Spring '08 term at University of California, Berkeley.

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HW3 answers - Name: _ SID: _ Discussion Section: _ Problem...

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