Suppose that the economy is initially in long-run equilibrium as depicted in the AD-AS model. Suppose politicians believe that the current level of output is too low and encourage the central bank to engage in expansionary monetary policy.
a. (4 points) Discuss two ways in which the Central Bank can try to increase the money supply. Be explicit.
b. (6 points) What are the effects of the expansionary policy in the short run? Show in the appropriate graph(s).
c. (5 points) Which two factors determine the magnitude of the effects in the short-run?
d. (6 points) What are the effects in the long-run, assuming no further shocks to the economy? Show in the appropriate graphs.
e. (4 points) How does this example illustrate monetary neutrality? Explain your answer.
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4. The CPI in year 1 = 120, the CPI in Year 2 = 144. Calculate the amount of inflation or deflation. Why is this important?
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Assume now that the world consists of only two countries: Brandtlandia and Hollandia. Every year many tourists visit each other’s countries. The only other good Brandtlandia imports is tulip bulbs. Brandtlandia uses the Thaler as currency, and Hollandia the Florin.
The policy options in Brandtlandia are copied here for your convenience.
Policy 1: Open the economy to trade with no trade protection.
Policy 2: Open the economy to trade but impose a tariff on the import of tulip bulbs that would set the price of tulip bulbs to 40 Thaler per tulip bulb.
Policy 3: Open the economy to trade but limit imports to a quota of 15 tulip bulbs.
Brandtlandia currently uses policy option 1, the equilibrium exchange rate (e) is 0.50 Florin for 1 Thaler (and this is the exchange rate notation you need to use for this question).
a. (4 points) If Brandtlandia implements policy option 2, what will be the initial effect on the exchange rate if the exchange rate is flexible? Explain your answer.
b. (5 points) Suppose that the central bank of Hollandia wants to offset the effect of policy option 2 on the exchange rate. How would it do so? What might be the reasons for doing so?
c. (6 points) Assume that the exchange rate is flexible and Brandtlandia chooses policy option 1. The price of a tulip bulb in Hollandia is 7.50 Florin, and 10 Thaler in Brandtlandia. Also assume that all prices (including the exchange rate) are fixed in the short-run. Is there purchasing power parity here? Explain your answer. Is the Florin overvalued or undervalued? What will happen in the long run to the exchange rate? Explain your answer.
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Consider two economies. In economy A: autonomous consumption equals 700, the marginal propensity to consume equals 0.80, taxes are fixed at 50, investment is 100, government spending is 100, and net exports are 40.
In economy B: autonomous consumption equals 1000, the marginal propensity to consume equals 0.8, taxes are proportional to income such that consumers pay 25% of their income as taxes, investment is 250, government purchases are 150, and net exports are 400.
(i) What is the planned aggregate expenditure (PAE) in each economy?
(ii) What is the short-run equilibrium output in each economy?
(iii) In which economy is the spending multiplier higher?
(iv) Suppose autonomous consumption fall by 500 in each economy. Which economy will see a higher drop in GDP? Compute the equilibrium output in each economy.
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how does having a flexible exchange rate affect a country's gdp as opposed to having a fixed exchange rate?
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How will you make customers read your corporate blog?
As an example, I have about 50 tabs (more, 30 in the phone only) with stuff I wanted to read but never got to it.
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Our natural resources are valuable and important to sustain so that we have continued access to these resources in the future. Please answer the following: What is a company’s obligation to contribute to the natural resource’s sustainability? If so, what does that obligation look like? Is this limited to local resources or globally as well
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Consider the economic impact of immigration on individual welfare for the different subpopulations
that comprise the U.S. labor market. Has immigration impacted them all uniformly or did it have
heterogeneous effects across different groups? If so, please briefly explain how the effects of
immigration may differ across different subpopulations of the U.S. labor market.
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What are the effects of a tariff? Briefly explain who benefits and who loses when tariffs are
imposed?
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17. Suppose that 1,000 people are interested in attending Elvis Land. Once a person arrives at Elvis Land, his or her inverse demand for rides is given by p(y) = 100 – 3y, where p is the price per ride. The cost function for rides in Elvis Land is c(y) = 20y + 0.5y2. Elvis Land charges a profit-maximizing two-part tariff, with one price for admission to Elvis Land and another price per ride for those who get in. What is the price for admission to Elvis Land?
- Answer: 40
18. Suppose that 1,000 people are interested in attending Elvis Land. Once a person arrives at Elvis Land, his or her inverse demand for rides is given by p(y) = 100 – 3y, where p is the price per ride. The cost function for rides in Elvis Land is c(y) = 20y + 0.5y2. Elvis Land charges a profit-maximizing two-part tariff, with one price for admission to Elvis Land and another price per ride for those who get in. What is the price per ride for those who get in?
- Answer: 600
19. Suppose that 1,000 people are interested in attending Elvis Land. Once a person arrives at Elvis Land, his or her inverse demand for rides is given by p(y) = 100 – 3y, where p is the price per ride. The cost function for rides in Elvis Land is c(y) = 20y + 0.5y2. Elvis Land charges a profit-maximizing two-part tariff, with one price for admission to Elvis Land and another price per ride for those who get in. What is the total monopolistic profit?
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3. Utilizing T-accounts for all relevant actors, answer the following questions,
a. If the FED buys a $10,000 treasury bill from Carlos Slim and he deposits the money in his bank, what happens to reserves and the monetary base?
b. If instead Carlos Slim deposits $5,000 in his bank and cashes in the remaining $5,000, what happens to reserves and the monetary base?
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Recall the “Nash Demand Game” from the presentation in which two siblings (A and B) must bargain for an inheritance of $1 million. Instead of the two submitting sealed proposals (Nash’s original story) or the two submitting potentially infinite offers and counteroffers to each other (Rubenstein’s bargaining game), suppose the will specifies the following procedure for splitting the inheritance: Sibling A will go first and submit an offer to Sibling B for how they are to split the $1 million. B can accept or reject this offer. If B accepts A’s offer, A and B are paid accordingly. If B rejects A’s offer, A and B will wait one year. After one year, B will submit an offer to A for how they are to split the $1 million. A can accept or reject this offer. If A accepts B’s offer, A and B are paid accordingly. If A rejects B’s offer, A will receive $200,000 and B will get nothing (i.e., the remaining $800,000 will go to charity). Assume that the siblings have identical discount factors of 0.75 (i.e., “a dollar one year from now is worth 75 cents to me today”). Also assume that both siblings are risk neutral, neither sibling receives any utility if the inheritance goes to charity, and neither sibling is worried about the fairness of the result. What will happen in this negotiation? How much of the inheritance will A receive and how much will B receive? (Hint: What happens in one year if B rejects A’s initial offer? What does that imply about what A’s initial offer must be for B to accept it?) Which sibling has the advantage under these rules? |
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