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macroeconomics principles

Questions and Answers of Macroeconomics Principles

LO3 Explain how the gains from trade are divided between trading partners.
LO2 Explain why nations import certain goods, even though they can be made more cheaply at home.
LO1 Explain the importance of international trade and why nations trade with each other.
10. (LO 3) What do monetarists say about the asset demand for money? Why do they believe this?
9. (LO 2) Would Keynesian monetary policy be more effective in dealing with a recessionary gap or an inflationary gap? Why?
8. (LO 2, 3) Explain how an increase in money supply affects the interest rate, investment, and income. How do the Keynesians and the monetarists differ in their views of this?
7. (LO 2) Why does contractionary monetary policy imply a leftward shift in the aggregate demand curve?
6. (LO 1) How does a surplus of money disappear?
5. (LO 1) Justin’s grandfather left him a $10 000 bond with exactly one year left until redemption. Its coupon rate is 8 percent per annum. The current rate of interest on similar bonds is 5
4. (LO 3) Table 9.3 shows actual data for the Canadian economy for the period 1993–1997 (all money figures in billions of dollars). For each year, calculate the velocity of money. (Hint: You may
3. (LO 1) What do we mean when we say a treasury bill is sold at a discount?
2. (LO 1) What are the two determinants of the transactions demand for money?
1. (LO 1) Explain why (or why not) each of the following will cause an increase in the transactions demand for money.a) an increase in price levelb) an increase in real incomec) an increase in
(LO 1, 2, 6) The money market in the country of Everton is depicted in Figure 9.16 (all figures are in billions of dollars).The investment demand curve is shown in Figure 9.17 and the product market
12. (LO 2) Table 9.2 shows the effect of changes in various economic variables in the countries of Beckland and Heineken.a) What is the effect of an increase of $10 million in money supply on the
11. (LO 3) Use Figure 9.15 to answer the following questions.a) Which graph in Figure 9.15A or B depicts the Keynsian view of the money market? Which is the monetarist view?b) Which graph in Figure
10. (LO 1) Adriana’s cousin has sent her a $20 000 bond, which pays annual interest of $1600. The bond has two years left until redemption. Adriana wants to cash in the bond to buy a truck. The
9. (LO 1) Assume that the original price of a three-month treasury bill with a redeemable value of $100 was $96, and one month later it was sold for $96. What is the change in the rate of return on
8. (LO 1) Table 9.1A shows abbreviated balance sheets for the central bank in the country of Beckland. Table 9.1B shows tables for its whole commercial banking system.The target reserve ratio for the
7. (LO 2) Figure 9.14 shows information for the economy of Heart.a) In figure A, illustrate the effect of an increase in money supply, which reduces the interest rate to four percent, and in figure
6. (LO 2) Figure 9.13 shows information for the economy of Tantalus.a) If money supply is equal to 60, what are the values of equilibrium interest rate and investment spending?Interest rate: %
5. (LO 2) Figure 9.12 illustrates the money demand and investment demand for the economies of Pabst and Kokanee.a) If money supply is increased by 10, what will be the new interest rate?Pabst:
4. (LO 1) Andra has just been given a $5000 one-year bond with a coupon rate of 7 percent per year. However, she needs the money now and is surprised to find that the market value of the bond has
3. (LO 3) In the country of Juventus, the money supply is equal to $40 (billion), the velocity of circulation is 5, and real GDP is $100 (billion).a) What is the price level in Juventus, and what is
2. (LO 2) The economy of Carlsberg is presently in equilibrium but is suffering a recession as depicted in Figure 9.11.The central bank of Carlsberg is introducing an expansionary monetary policy
1. (LO 3) In the country of Sparta, money supply equals 11 million drams, real GDP is 70 million drams, the price level is 1.1, and the velocity of money is 7.a) What is the value of its nominal
10.a) If M is $100, P is $2, and Q is 500, what is the value of the velocity of money?b) Given the same parameters as in (a), if the velocity of money stays constant, and assuming the economy is at
9. What would be the effect on the level of investment and real income if the money supply were reduced?
8. If the price level increases, what effect will this have on interest rates, investment, and the aggregate quantity demanded?
7. If the Bank of Canada wanted to decrease the money supply, should it buy or sell government bonds?
6. Which of the four former goals of the Bank of Canada are in conflict with each other, and which are compatible?
5. Suppose that the banking system’s target reserve ratio is 10 percent and the Bank of Canada switches $100 million of government funds from government’s account with the Bank of Canada to an
4. Here are balance sheets for the commercial banking system and for the Bank of Canada (all figures are in billions). Show the effects on the balance sheets of both the Bank of Canada and the
3. In terms of the banking system’s ability to create money, what difference, if any, does it make if the Bank of Canada buys bonds from a commercial bank rather than from a member of the public?
2. Assume that the money demand for a particular economy is as follows. (All figures are in billions of dollars.)Rate of Asset Transactions Total Interest (%) Demand ($) Demand ($) Demand ($)12 50 80
1. Assume you are given the following asset demand for an economy:a) Assume that the nominal GDP in this economy is $800 and that the transaction demand for money is equal to 10 percent of nominal
LO7 List some of the recent criticisms of anti-inflationary monetary policy
LO6 Explain why anti-inflationary policy emphasizes targeting the interest rate.
LO5 Explain why most central banks around the world believe targeting the interest rate is the most effective monetary tool.
LO4 Explain why many economists are critical of attempts to target the money supply.
LO3 Explain why monetarists believe that controlling the money supply is vital.
LO2 Explain how the Keynesian transmission process works by targeting the money supply.
LO1 Describe the determinants of money demand and supply, and explain how equilibrium in the money market is achieved.
10. (LO 2) Many people believe that the ability to buy goods with credit cards makes such cards money. Explain why a credit card is not money. Do you think that debit cards are money?
9. (LO 3) What does it mean for a bank to be over-reserved?
8. (LO 3) What is included in a list of a bank’s assets?
7. (LO 2) Many students think that government (or the Bank of Canada) still has a pile of gold somewhere that “backs”our money. Since this is not true, what does back Canadian money?
6. (LO 1) What two key factors resulted in the early merchant banks becoming modern commercial banks?
5. (LO 1) What is the earliest origin of money?
4. (LO 2) What is meant by the term the spread?
3. (LO 1) What are the three functions of money?
2. (LO 3) In which of the following circumstances has the money supply changed?a) Mario deposits $1000 at his bank.b) Mario withdraws $1000 from his bank.c) Mario lends Luigi $1000.d) The bank lends
1. (LO 3) Name the necessary bookkeeping entries in the accounts of the Friedman Bank to record the following transactions.a) The Friedman Bank sells some of its old computers for$20 000 in cash.b)
(LO 3) Table 8.11 is the current balance sheet for the Maple Leafs Bank. Answer the following questions, assuming that the bank’s target reserve ratio is 5 percent.a) Is this bank over- or
11. (LO 3) Rearrange the items in the balance sheet shown in Table 8.10 so each is in the correct position. Change one figure only to reflect the bank achieving a 5 percent target reserve ratio
10. (LO 3) Table 8.9 is the combined balance sheet for all the banks in a banking system. Each bank has a target reserve ratio of 4 percent.a) Fill in the blanks in column 1 reflecting the complete
9. (LO 3) Table 8.8 is the balance sheet for all the banks combined in the banking system.a) Which one of the figures is part of the money supply?b) If all banks maintain 100 percent reserves, what
8. (LO 3) The central bank of Muldovia has issued$100 000 in Muldovian dollars. What is the size of the Muldovian money supply under the following circumstances?a) Muldovians have deposited none of
7. (LO 3) Table 8.7 is the balance sheet for the Senators Bank. The target reserve ratio is 10 percent.a) What is the size of the bank’s excess reserves?b) Change the balance sheet in columns 1 to
6. (LO 3) Fill in the blanks in the balance sheet of the Flames Bank in Table 8.6, assuming that the value of fixed assets is the same as shareholders’ equity and that the bank is fully loaned up.
5. (LO 2) Answer the questions below from the data in Table 8.5. (All figures are in billions of dollars.)a) What is the total currency in circulation?b) How much larger is M1 than the total currency
4. (LO 3) Table 8.4 is the balance sheet for all banks combined in the banking system. All banks have a target reserve ratio of 8 percent.a) What is the amount of excess reserves?b) What is the
3. (LO 3) Table 8.3 is the balance sheet for the Oilers Bank, which has a target reserve ratio of 5 percent.a) By how much is the Oilers Bank over- or under-reserved?b) If the bank makes a loan equal
2. (LO 3) What is the value of the money multiplier if the target reserve ratios of all banks in the banking system are as follows?a) 2 percentb) 5 percentc) 8 percentd) 12 percent
1. (LO 3) Table 8.2 shows the balance sheet of the Bruins Bank.By how much is the Bruins Bank over- or under-reserved, if the target reserve ratio isa) 2 percentb) 5 percentc) 8 percentd) 12 percent
11. The J.M.K. Bank has demand deposits of $60 000 and reserves of $6000.a) By how much can it increase its loans if the target reserve ratio is 8 percent?b) By how much can it increase it loans if
10. What will be the increase in total deposits in the whole banking system following a new deposit of $2000 into the XYZ bank in each of the following circumstances?a) a target reserve ratio of 20
9.a) Given the Islanders’ Bank balance sheet in question 8, how much does it have in excess reserves if the target reserve ratio is eight percent?b) How much does it have in excess reserves if the
8. The following is the balance sheet for the Islanders’ Bank.Reserves 5 000 Demand deposits 60 000 Loans 41 000 Shareholders’ equity 10 000 Securities 18 000 Fixed assets 6 000 70 000 70 000a)
7. Assume that the nation’s banking system is over-reserved by$20 million. What is the value of the money multiplier, and what is the maximum possible expansion in the money supply if the target
6. Give the necessary bank bookkeeping entries for each set of circumstances below.a) The bank makes a $2000 loan to Fadia.b) Fadia writes a $2000 cheque to Middle East Travel, which has its accounts
5. Given the following data (all in billions of dollars) what are the values of M1, M2, and M3?Coins 13 Certificates of deposit 137 Demand deposits 72 Notice and personal term deposits 215 Notes 27
4.a) If David deposits $240 cash into his chequing account at a commercial bank, has the money supply changed?b) If, later on, David transfers this $240 from his chequing account to a saving account
3. Explain the difference between commodity money and fiat money.
2. Given the clothes/table example above, how many suits of clothes would it cost to buy a table if a litre of beer is worth only one loaf of bread?
1. What do you think Adam Smith might have meant when he said “Money is a veil”?
LO3 Explain how a small amount of cash can support many loans and create more money
LO2 Explain what is and is not money, and describe the main function of modern banks as moneylenders.
LO1 Describe the functions, characteristics, and history of money.
10. (LO 3) Explain the crowding out effect.
9. (LO 3) Explain two sets of circumstances where a balanced-budget fiscal policy would be procylical.
8. (LO 5) Explain how paying off the national debt would redistribute income.
7. (LO 2) What is the primary goal of countercyclical fiscal policy? What are three criticisms of it?
6. (LO 2) Explain some of the problems associated with a countercyclical fiscal policy.
5. (LO 2, 3) Suppose that a federal election is called at a time when the economy is experiencing a recessionary gap and there is a budget deficit. The leader of Party A promises, if elected, to
4. (LO 5) To whom does the federal government owe most of its debt?
3. (LO 1) Define fiscal policy.
2. (LO 5) Complete Table 7.10 for the economy of Smetana.Year Budget Surplus Budget Deficit National Debt GDP Debt/GDP %2010 / / 280 700 2011 / 14 725 2012 323 730 2013 8 / 45.0 2014 310 720 2015 / 6
1. (LO 2) Figure 7.14 shows the economy of Tagara. Its aggregate demand is currently AD1 and the budget line is BL1.a) What effect would an increase in government spending have on each of the
(LO 2, 3) Figure 7.13 shows the aggregate demand/supply and the government budget line for the economy of Mahdi. The economy is presently at equilibrium. For every $1 change in government spending,
10. (LO 2, 3) Suppose that the government of Malud increases both its own spending and autonomous taxes by $100 and the economy’s multiplier equals 2.5. If consumers spend 80 percent of their
9. (LO 2, 3, 4) The government of Osiris believes in balancing its budget over a seven-year cycle. Over the first six years, it has maintained its spending at $150 billion and its MTR at 0.25. (There
8. (LO 2, 3) The following is information for the economy of Tandor, where taxes are wholly autonomous.C = 40 + 0.8YD where YD = (Y - T) and G = T = 340 I = 100 XN = 107 - 0.1Ya) What is the value of
7. (LO 2) Examine the graph of government spending and net tax revenues in Figure 7.12A.a) Draw the corresponding budget line in Figure 7.12B.b) If government spending were to decrease by 40, draw in
6. (LO 3) The following are data for the economy of Moksha.C = 25 + 0.6Y G = 160 I = 60 XN = 55 - 0.1Ya) Calculate equilibrium GDP.b) Calculate the multiplier.c) If the tax function is T = 20 + 0.2Y,
5. (LO 1, 2, 3) The aggregate demand and supply for Cancum are shown in Table 7.8. Potential GDP (LAS) is $1500 billion.a) If the economy is in equilibrium, is the economy experiencing an
4. (LO 2) Answer the questions below for the economy of Motak, using the graph in Figure 7.11.a) If GDP is $800 and government spending is G1, what is the size of Motak’s budget deficit?b) If
3. (LO 1, 2) The economy of Morin is shown in Figure 7.10.a) If potential GDP (LAS) is $540, and the economy is presently in equilibrium, is there an inflationary or a recessionary gap? How much of a
2. (LO 1) Government spending in Robok is $140 billion, and its only tax is an income tax with a marginal tax rate of 0.35.a) What is the balance on the government’s budget at a GDP level of $360
1. (LO 1) Table 7.7 shows the revenue and spending of the Canadian government. For simplicity, assume that all of the spending grants to other levels of government were spent in Canada on goods and

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