Q.1. Define money. How does the economist's use of this term differ from its everyday

meaning?

a. What are the three functions of money? How does each function contribute to a more

smoothly operating economy?

b. Who determines the nation's money supply? Explain how the money supply could be

expanded or reduced in an economy in which all money is in the form of currency.

c. What are the four characteristics of assets that are most important to holders of wealth?

How does money compare with other assets for each characteristic? List and discuss the

macroeconomic variables that affect the aggregate demand for money.

Q.2. Use the saving-investment diagram to analyze the effects of the following on national

saving, investment, and the real interest rate in a small open economy. Explain how it will effect

current account surplus of a country.

a. Consumers become more future-oriented and thus decide to save more.

b. The government announces a large, one-time bonus payment to veterans returning from a

war. This bonus will be financed by additional taxes levied on the general population

over the next five years. Hence, future taxes will be imposed and it will reduce future

income of consumers.

c. Wealth of country is increased.

d. A large number of accessible oil deposits are discovered, which increases the expected

future marginal product of oilrigs and pipelines. It causes an increase in expected future

income.

Q.3. Acme Widget, Inc. has the following production function.

Number of Workers 0 1 2 3 4 5 6

Number of Widgets produced 0 8 15 21 26 30 33

c. Find the marginal product of labor (MPN) for each level of employment.

d. Acme can get $5 for each widget it produces. How many workers will it hire if the

nominal wage is $38? If it is $27? If it is $22? (Make comparison of Marginal revenue

product of labor with nominal wage rate while deciding about hiring of labor.