Question

Suppose that the total checkable deposits in the entire banking system of an economy is $100 billion. The total required reserves are $10 billion. Further, banks do not hold any excess reserves, and individuals do not hold any cash in the economy.

A) In this economy, if the Federal Reserve buys $10 million worth of government securities, then by how much will the money supply increase?

B) Will the change in money supply be greater or lesser than what you derived in part A if the banks hold excess reserves and individuals hold cash? Explain your answer.

Suppose that the U.S. economy is in a recession, and the Federal Reserve Bank decides to use monetary policy to help the economy recover.

The goal is to increase the real GDP by $500 billion. The Federal Reserve Bank chooses open-market operations as the desired tool to achieve this.

It has the following information about the economy:

(1) all money is held as deposits, and banks do not hold excess reserves;

(2) a $1 change in the money supply leads to a $2 change in real GDP; and

(3) the reserve requirement on banks is 10%.

Given this information, answer the following questions:

A) Should the Federal Reserve Bank BUY or SELL Treasury securities to achieve this?

B) What is the value of open-market operations that the Federal Reserve Bank must carry out to help the economy recover from the recession?

C) Explain the logic behind how the open-market operations can help the economy recover.

Which of the following statements is TRUE?

Select one:

a. An increase in the real GDP automatically leads to an increase in the value of the Human Development Index.

b. Countries with high real GDP per capita tend to rank lower on the Human Development Index.

c. Income per capita is included in the Human Development Index.

d. The Human Development Index and real GDP are equivalent ways of measuring economic development.

Answer 1

Don't hesitate to leave a comment below to clarify any further doubts thu

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a) FALSE: Compared to GDP, the HDI has a greater emphasis on the quality of life and human development. Not just production capacity, but Education and health of a country's residents are considered. GDP is considered a means to human development, but not an end.

b) FALSE: The rank correlation between real GDP per capita and HDI is higher in high and medium human development countries compared to the low human development group.

c) TRUE: A decent standard of living – measured by Gross National Income per capita adjusted for the price level of the country - is incorporated into calculation of HDI.

d) FALSE: GDP is considered a means to human development, but not an end. GNI per capita, which is essentially the representative individual's purchasing power, is an important component in calculating Human Development Index, but just one of many. However, there's a significant degree of correlation between HDI and GDP.