Answe key to AS2

# Answe key to AS2 - Econ 199 Macroeconomic Theory I...

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Econ 199 Macroeconomic Theory I Assignment 2 (Chapter 4,5 &6) Due: in TA’s tutorial, March 26th, 2009, Thursday 1. Label each of the following statement true, false, or uncertain. Explain briefly. a) Income and consumption are both examples of stock variables. F. Income is a flow. b) The central bank can increase the supply of money by decreasing the reserve ratio. T. Supply of money= H c c ) 1 ( 1 + θ , where is the reserve ratio. c) By construction, bond prices and interest rate always move in the same direction. F. Bond price= i Value Face + 1 _ d) The changes of the money supply will lead to a shift of the IS curve since it will affect the interest rate. F. Change of the money supply will lead to a shift of LM curve. e) If government spending and tax increase by the same amount, the IS curve does not shift. F. If government spending and tax increase by the same amount, the IS curve will shift. f) It is not possible for government policy to increase output without changing the interest rate. F. It is possible with policy mix. g) Bargaining power of workers only depend on the labor market condition and the nature of the job. F. It also depends on the reservation price. h) The natural rate of unemployment is unaffected by policy changes. F. It is affected by policy like unemployment benefits. 2. Question 7 of Chapter 4 in the textbook.

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ATMs and credit cards This problem examines the effect of the introduction of ATMs and credit cards on money demand. For simplicity, let’s examine a person’s demand for money over a period of 4 days. Suppose that before ATMs and credit cards, this person goes to the bank once at the beginning of each 4-day period and withdraws from her savings account all the money she needs for 4 days. Assume that she spends \$4 per day. a. How much does this person withdraw each time she goes to the bank? Compute this person’s money holdings for days 1 through 4 (in the morning, before she spends any of the money she withdraws). \$16 is withdrawn on each trip to the bank. Money holdings are \$16 on day one; \$12 on day two; \$8 on day three; and \$4 on day four. b. What is the amount of money this person holds, on average? Average money holdings are (\$16+\$12+\$8+\$4)/4=\$10. Suppose now that with the advent of ATMs, this person withdraws money once every two days. c. Recompute your answer to part (a). \$8 is withdrawn on each trip to the bank. Money holdings are \$8, \$4, \$8, and \$4. d. Recompute your answer to part (b). Average money holdings are \$6. Finally, with the advent of credit cards, this person pays for all her purchases using her card. She withdraws no money until the 4 th day, when she withdraws the whole amount necessary to pay for her credit card purchases over the pervious 4 days. e.
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Answe key to AS2 - Econ 199 Macroeconomic Theory I...

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