ECO403S
Spring 2016
Prof: A. Nelson
Date: 02/23/2016
Answer: Problem Set # 1
(1) Consider a firm that has two possible projects that cost $100 each; one produces $125 for sure and one
produces $150 with probability 2/3. A bank lends enough money for one p
Monetary Theory and Policy
Notes
David L. Kelly
Department of Economics
University of Miami
Box 248126
Coral Gables, FL 33134
dkelly@miami.edu
First Version: Fall, 1999
Current Version: Spring 2012
INTRODUCTION AND REVIEW
I
A
Introduction
what is Monetary
THE MARKET FOR MONEY
I
A
Money Supply
Money Supply Function
Our denition of M1 is currency HELD BY THE NON BANK PUBLIC, C (this is cash in
wallets), and checkable deposits, D . Let M 1 = M , then we have:
M =C +D
(5)
Denition 22 CURRENCY TO DEPOSIT RATIO:
THE PHILLIPS CURVE
I
A
The Phillips Curve in the Data
The Original Phillips Curve
Denition 36 The PHILLIPS CURVE is the relationship between unemployment (or sometimes output) and ination.
Phillips, an economist in Britian, plotted ination vs. unemploymen
First challenge: Review, Eco 403, spring 2012
The following questions are taken from past challenges. The format is 4-5 short answer and
2-3 longer questions. The formulas provided below will also be provided on the challenge.
All questions come from the
Second Challenge: Review, Eco 403, Spring 2012
The formulas provided below will also be provided on the challenge. All questions come from
the notes (ination tax to Lucas monetary misperceptions). Also review chapters BM:5.15.8, DC:12, BM:9.2, DC:512-16,
First challenge: Review solutions
spring 2012
Short answer questions (1-2 sentences)
Question 1
a. A decrease in the interest rate decreases the opportunity cost of holding money. Therefore, households make less withdraws and save on the cost of withdraws
U.S. Velocity: upward trend but varies with R
22
Consumption Velocity
20
Income Velocity
18
$2005 spent per year
16
High R
14
12
10
8
6
4
2
1960
1965
1970
1975
1980
1985
year
1990
1995
2000
2005
ECO403E
Spring 2016
Prof: A. Nelson
Date: 02/09/2016
Problem Set # 1
Due Date: Monday, February 16, 2016
(1) Consider a firm that has two possible projects that cost $100 each; one produces $125 for sure and one
produces $150 with probability 2/3. A bank
Lecture # 3
Banking and the
Management of Financial
Institutions
Read chapter 10
To understand how banks work we first review their balance
sheet
It shows that:
Total Assets = Total liabilities + Capital
Or
Capital = Total Assets - Total liabilities
Basic
POLICY IMPLEMENTATION
The charter of the FED states that the FED should endeavor to keep ination low (price
stability) and promote growth (low unemployment). Suppose at the end of the day the FED
decides that ination should be 4%. How, on a day to day bas
CLASSICAL MODEL
Previously, we looked at high ination countries, where ination was so high that changes
in most variables (interest rates and GDP) were small enough that they could be ignored.
Only growth in prices, money, and expectations mattered. In co
Monetary Theory and Policy
Graphs
David L. Kelly
Department of Economics
University of Miami
Box 248126
Coral Gables, FL 33134
dkelly@miami.edu
First Version: Spring 2011
A
Introduction
CPI/Ination
Consumer Price Index (all goods, 198284 average =100
250
Homework 1: Solutions
Monetary Theory and Policy: ECO 403
Question 1.
Neither. The repo account at the investment bank does not create any additional money.
The investment bank buys a tbill from a corporation such as Apple. This opens the repo
account (th
Homework 1
Monetary Theory and Policy: ECO 403
Due: Wednesday, February 8, 2012
Question 1.
Sometimes investment banks also enter into repurchase agreements with large countries/corporations.
The dierence is that the country/corporation does not typically
Homework 2: Solutions
Eco 403, Spring 2012
Question 1
a. We have:
senioraget =
Ht+1 Ht
$600
= $224.9 = 2.7 billion goods.
Pt
good
(1)
b. Seniorage is the purchasing of goods or assets with printed money. Here the government
buys an asset, which is a mortg
Homework 2: Eco 403, Spring 2012
Due Wednesday, March 21, 2012
Question 1
Calculate the seniorage revenues (if any) for each FED action below. If no seniorage revenues
result, will the policy give the FED any other revenues or costs? (No need to calculate
Homework 3: Solutions
Monetary Theory and Policy: ECO 403
Question 1.
a. The FED responds in a xed way to changes in the economy (the FED cannot change
the respose to increasing the money supply growth rate to 2% or 3% in response to a
one percent increas
Homework 3
Monetary Theory and Policy: ECO 403
Due: Wednesday, April 18, 2012
Question 1.
Classify each of the following as either rule or discretion and as either counter-cyclical, procyclical, or neither.
a. The FED increases the money supply growth rat
MONEY DEMAND INSENSITVE TO r SLOPE OF LM CURVE = r / Y r Y MS r LM Curve is Steeper
r1 r r0
MD(y1) MD(y0) real money MONEY DEMAND SENSITVE TO r SLOPE OF LM CURVE = r / Y r r y0 Y y1 y
Y r1 r0 MD(y0) MD(y1)
LM curve is flat
real money
y0
Y
y
First challenge solutions
Eco 403, spring 2012
Question 1 (12 points)
a. The opportunity cost of holding money decreases. Since the interest bearing account is
less attractive and the cost of withdraws is unchanged, households make less withdraws.
b. A de
First challenge: Eco 403, spring 2012
The challenge is closed book. The following formulas may be useful.
Ination and Interest Rates
GDP Deator =
CPI =
P1,t Q1,t + P2,t Q2,t + . . . + Pn,t Qn,t
100,
P1,b Q1,t + P2,b Q2,t + . . . + Pn,b Qn,t
P1,t Q1,b + P
Second Challenge: Solutions
Eco 403, Spring 2012
Question 1 (10 points)
If ination is below expectations, some rms misperceive and raise prices too much. These
rms see a decrease in demand, which they misperceive as relative. The rms then reduce
productio
Second Challenge: Eco 403, Spring 2012
The following formulas may be useful. The challenge is closed book. Good luck.
Money Supply
M = Hk (R) ,
MS = m =
M
P
,
M = Hk (R) ,
h=
H
,
P
k (R ) =
cr + 1
cr + rrr + e (R R0 )
m = hk (R)
Money Demand
MD =
Y
,
2R
M
Final challenge: Review
Eco 403, spring 2012
The following questions are taken from past challenges. The format is 4-5 short answer and
2-3 longer questions. The formulas provided below will also be provided on the challenge. All
questions come from the n