Real money supply would have increased. , the denominator would have increased by
less than increase in the numerator.
4
Student number: __________________________

Economics 3B Semester Sick Test 1 – 14 October 2013
1.4
Using your answer in 1.3 above, depict the impact on the following three markets according to the
classical school. Start from the equilibrium in all markets.
(10)
Question A2
[5]
You are given the following information:
Calculate the following:
Nominal GDP
16 000
Money supply
4 000
Consumer Price Index
100
Interest rate level
7%
Price level
100
a)
Velocity
(2)
MV = PY
4000V = 16
000
V = 4
b)
Real GDP
(2)
=
160
5
Student number: __________________________
(1)
Capital market
(2)
Loanable funds
(3) Bond market
r
i
P
S/I
LF
Bond
I
S
r0
i0

Economics 3B Semester Sick Test 1 – 14 October 2013
c)
Calculate velocity if money
supply decreases to R800
(1)
800V = 1 6000
V = 20
6
Student number: __________________________

Economics 3B Semester Sick Test 1 – 14 October 2013
Question A3
[7]
3. You are given the following information:
3.1 Use the data to construct a yield curve
(4)
3.2
If expectation theory holds true, what does the yield curve tell us? Explain you answer.
(3)
Interest rate today
10%
Interest rate expected in 2 years
5%
Interest rate expected in 4 years
2%
Return on 1-year bond
6%
Return on 2-year bond
12%
Return on 4-year bond
13%
Short term interest rates are expected to increase. Positively sloped yield curve. According to the
expectation theory, the long term interests rate equals the average of the short term interest rates.
7
Student number: __________________________
Yield
Maturity
1 year
2 years
4 years
6%
12%
13%

Economics 3B Semester Sick Test 1 – 14 October 2013
Question A4
[8]
4.1
Indicate with a cross how each of the listed events will affect: (1) the actual M3; and (2) the
maximum potential M3, ceteris paribus, if money supply is endogenous.
For the purpose of this question,
assume that the money market is in equilibrium on the part of the money supply curve that is elastic with
respect to the interest rate.

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- Spring '11
- Mohammad
- Inflation, Foreign exchange market