Tutorial 6_2011_answer guide for students_

Tutorial 6_2011_answer guide for students_ - ECON1002...

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ECON1002 Introductory Macroeconomics, S1 2011 Tutorial Tasks 1 Reading Guide: Review Chapters 9 and 10 of BOF as preparation for this tutorial. You should also look over your lectures notes for Weeks 5 and 6. Key Concepts: Bank creation of money; the Quantity Theory; Open market operations; The Reserve bank and interest rate targeting, Policy reaction function. R EVIEW OF C ONCEPTUAL U NDERSTANDING These are to be attempted before the tutorial. They will not normally be covered in the tutorial, maybe, except for a quick review, time permitting. The answers are typically found in the textbook and lecture notes. 1. Why is it important for the Quantity Theory that the velocity of circulation be constant? Is it likely that the velocity of circulation is constant? Explain. 2. What do you understand by the open market operations? 3. How is monetary policy conducted though setting interest rates? How is it different from conducting monetary policy through setting money supply? 4. Define policy reaction function. Sketch a policy reaction function relating to the Reserve Bank’s setting of the real interest rate. 5. What is the mechanism by which monetary policy affects the economy? P ROBLEMS * N OTE : S TUDENTS ARE REQUIRED TO SUBMIT WRITTEN ANSWERS TO P ROBLEM (S) MARKED WITH ASTERISKS (*) IN THEIR DESIGNATED TUTORIAL CLASSES . 1. D ISCUSS WHY OFFICIAL MEASURES OF THE GOVERNMENT BUDGET DEFICIT / SURPLUS ARE MISLEADING . W HAT CORRECTIONS NEED TO BE MADE AND WHY ? I NFLATION ADJUSTMENT AND CYCLICAL ADJUSTMENTS 2. Real GDP is $8 trillion, nominal GDP is $10 trillion, M1 is $2 trillion, and M3 is $5 trillion. a. Find velocity for M1 and for M3. b. Show that the quantity equation holds for both M1 and M3. T UTORIAL 6 (Week 7: beginning 11 th April)
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