Q.2(20 points)Consider the following table.

Quantity Total Cost

0 $46

2 $47

4 $48

6 $49

8 $51

10 $57

12 $65

14 $75

16 $87

(1)Suppose that the price of the product is $5.How many units will the firm produce in the short run?

Answer:

Suppose that the price of the product is$5. The firm will produce 14 units in the short run.

(2)In the long run, will the price rise or fall from the current level at $5?Explain the reason.

Answer:

From the table below, we can see Price ($ 5)

5(20 points)Suppose that the T-account for First California Bank is as follows.

Assets Liabilities

Reserves $100,000 Deposits $500,000

Securities 50,000

Loans 350,000

(1)Suppose that the Fed sells $20,000 securities to First California Bank. Draw the new T-account for First California Bank right after the Fed's sale.

Answer:

Assets Liabilities

Reserves $80,000 Deposits $500,000

Securities 70,000

Loans 350,000

(2)Suppose that all banks, including First California Bank, continue to holds the exact amount of required reserves. As a result of the Fed's sale of $20,000 securities to First California Bank, how much of money supply will change?Is the change in money supply an increase or a decrease?

Answer:

First California receives $20,000 securities for the Fed, and the securities decreases the bank's reserves by $20,000.So, the amount of the bank's reserves will be $80,000.

The decrease of $20,000 in the bank's reserves amounts to an decrease in the monetary base in the economy, and results in the decrease in the money supply in the economy.

We know that the multiplier is (1/R) = 1/0.10 = 10.

So, the money supply will decrease by 20,000 10 = $200,000.

(Change in money supply = Change in Monetary Base Multiplier.)

Q.6(10 points)Smith, a U.S. citizen, has been working as an executive of atelecommunication company in U.S., and her annual salary in 2014 was US$170,000.Her salary was expected to remain unchanged if she continued to work in the company. At the end of the year 2014, however, she was recruited by a media company in Brazil, so she started working in Brazil from January 2015, making an annual salary of US$190,000.Assuming that the amount of her salary equals the amount of her contribution to the production in the company she works for, how much the annual U.S. GDP and GNP in 2015 was changed due to her job relocation?Clearly show the reasoning for your answer.

Answer:

GDP is the value of all final goods and services produced within a country in a unit period of time. Y= C+I+G+NX=C+I+G+(Ex-Im)

GNP is the value of all final goods and services produced by citizens of the country in a unit period of time. GNP= GDP- factor income earned by foreigners working in the country + factor income earned by the citizens working abroad.

Smith's income decreases the GDP of U.S. by $190,000 because the salary accounts for the output made out of U.S (in Brazil).The GNP of U.S. equals the GDP plus factor incomes of U.S. citizens generated in foreign countries minus factor incomes of foreigners generated in U.S.The $190,000 salary paid to the Smith constitutes a factor income of U.S. citizens generated in foreign countries. Therefore, the Smith's income does not influence the GNP of U.S.