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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View Full DocumentATMs 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 4day 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$16 is withdrawn on each trip to the bank.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$8 is withdrawn on each trip to the bank.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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 Spring '09
 JennyXu
 Macroeconomics, Interest Rates, Monetary Policy, money holdings

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