ECO 2013 Prob Sets.doc

# Word count name prof hj van boven class days time eco

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NAME: __________________________ PROF. H.J. VAN BOVEN CLASS DAYS & TIME: ____________ ECO 2013 / MACRO APPLIED LEARNING PROBLEM SET (2 pages) Chapter 13: Fiscal Policy, Deficits, and Debt 1. [4 points] The purpose of this exercise is to examine how countercyclical stabilization policy attempts to “lean against the wind” or change the prevailing level of aggregate demand A media report states: “Firms cut back on investment spending causing a recession.” Prior to the recession assume the economy was producing at its potential real GDP and the price level was stable. The decrease in I G created a negative GDP gap, actual real GDP is \$200 billion below potential real GDP. Policymakers decide to use discretionary fiscal policy to increase aggregate demand. POLICY OPTION 1: A change in government purchases. Predict how much government purchases (G) would have to change in order to return the economy to its full-employment level of real GDP. Assume the economy’s marginal propensity to consume or MPC = 0.75 and that there is no crowding-out effect. MUST SHOW THE FORMULA AND YOUR CACULATIONS FOR 1a - d a. To close the recessionary gap government purchases must _______________ by \$______ billion. Formulas: Multiplier = Δ GDP = Multiplier x Δ G POLICY OPTION 2: A change in taxes. Predict how much tax revenues would have to change in order to return the economy to its full-employment level of real GDP. The MPC = 0.75 and there is no crowding-out effect. b. To close the recessionary gap consumption (C) must _______________ by \$______ billion. Formula: Δ GDP = Multiplier x Δ C To achieve this change in the level of consumption spending c. tax revenues must _______________ by \$______ billion d. which will _______________ disposable income by \$______ billion Formula: MPC x Δ Income = Δ C
-2- Ch13 2. [2 points] Define the federal deficit . 3. [2 points] Define the federal or public debt . 4. [2 points] Explain why a large public debt does not threaten to bankrupt the federal government, leaving it unable to pay interest and principal on the public debt. 5. [3 points] List and define the three “timing problems” which are complications that arise in the implementation of fiscal policy. a. b. c. 6. [2 points] Explain the crowding-out effect .

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NAME: __________________________ PROF. H.J. VAN BOVEN CLASS DAYS & TIME: ____________ ECO 2013 / MACRO APPLIED LEARNING PROBLEM SET (2 pages) Chapter 15: Money Creation 1. Equations needed to determine required reserves and excess reserves a. Required reserves = Required reserve ratio _________________________ b. Actual reserves = Required reserves + _________________________ 2. The purpose of this exercise is to show that a single bank in a fractional-reserve banking system creates money by making a loan or monetizing a promissory note. Bank of America’s (BOA) balance sheet indicates: Assets Liabilities Reserves \$40,000 Checkable deposits \$100,000 Loans outstanding \$50,000 Treasury securities \$10,000 MUST SHOW FORMULA AND CACULATION FOR 1a AND 1b Assume the Fed sets the reserve requirement at 10%.
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