Winter 2011 Midterm 2 Answers

Ii iii i b i ii iii c ii i iii d iii i ii 20

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Unformatted text preview: hecking account to your checking account a. II > III > I b. I = II = III c. II > I > III d. III = I > II 20. The Federal Reserve does all of the following EXCEPT FOR a. buying and selling non-traditional assets, such as mortgage-backed securities. b. physically printing money. c. making overnight loans to banks. d. setting the minimum reserve ratio that banks may use. Page 5 of 11 Econ 102 Midterm 2 Short Answer 1 March 17, 2011 (8 points total) Consider an economy where the market for private loanable funds is described by IS r 2r − 10 ID where = = 20 − r = nominal interest rate in percentage terms (r = 5 means  5% ) and private loanable funds in billions of dollars. Initially, there are no income taxes and and G = 11 I is quantity of T R = 9 , T = 10, (all measured in billions of dollars.). There is no international trade. a. Calculate equilibrium I and r in this market. (1 pt) and then plug in to solve for Set Is = ID and then solve for r, I. Is = Id 2r − 10 = 20 − r 3r = 30 r I = 10% = 2 ∗ 10 − 10 I= 10 1 1 2 point for correct setup, 2 point for correct answer b. The savings rate s in this economy is equal to MPS = 1  MPC, and in this economy MPC = 0.75. Total investment spending is equal to the sum of private savings and government savings. Private savings is equal to s*Yd. i. Write down the government savings equation/identity and calculate the exact value of government savings in this economy. (1 pt) Government savings identity SG SG = SG 1 2 point for correct setup = T − G − TR = −10 SG = T − G − T R, 10 − 11 − 9 1 2 point for correct answer 1 ii. Calculate equilibrium income Y (not just Yd) in this economy using the investment = savings identity, given your answer to part (a). (2 pts) Investment savings identity with SG = −10 and I = 10 from before I = Sp + SG I = sYd − 10 10 .25 ∗ (Y − T + T R) − 10 20 = .25 ∗ (Y − 10 + 9) 80 = Y −1 Y 1 point for correct setup = = 81 I = sYd − SG , 1 point for correct answer Sp = sYd into the inv...
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This note was uploaded on 06/12/2012 for the course ECON 102 taught by Professor Rossana during the Spring '08 term at University of Michigan.

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