Problem+Set+_3[1] - Name: _ (Last name, first name) SID: _...

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Name: _________________________ (Last name, first name) SID: _________________________ GSI: _________________________ Econ 100B Macroeconomic Analysis Professor Steven Wood Spring 2010 Problem Set #3 Due: March 16, 2010 (at the beginning of class) Please sign the following oath: The answers on this problem set are entirely my own work. I neither copied from the work of others nor allowed others to copy from my work. _______________________________________ Signature Any problem set turned in without a signature will be assigned a grade of zero. Problem Set Instructions 1. When drawing diagrams, clearly and accurately label all axis, lines, curves, and equilibrium points. 2. Graphs and equations MAY be drawn by hand. 3. Explanations MUST be word-processed. Your explanations should be succinct and to the point. Problem Set #3 1/13
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A. Multiple Choice Questions (30 points) . Circle the letter corresponding to the best answer. (3 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. Problem Set #3 2/13
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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. Shift to the left as the real money supply rises. c.
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Problem+Set+_3[1] - Name: _ (Last name, first name) SID: _...

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