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The economy of Elmendyn contains 2,000 $1 bills.

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1. The economy of Elmendyn contains 2,000 $1 bills.;(a) If people hold all money as currency, what is the quantity of money?;(b) If people hold all money as demand deposits and banks maintain 100 percent;reserves, what is the quantity of money?;(c) If people hold equal amounts of currency and demand deposits and banks maintain;100 percent reserves, what is the quantity of money?;(d) If people hold all money as demand deposits and banks maintain a reserve ratio of;10 percent, what is the quantity of money?;(e) If people hold equal amounts of currency and demand deposits and banks maintain;a reserve ratio of 10 percent, what is the quantity of money?;2. The economist John Maynard Keynes wrote: Lenin is said to have declared that the;best way to destroy the capitalist system was to debauch the currency. By a continuing;process of inflation, governments can confiscate, secretly and unobserved, an important;part of the wealth of their citizens. Justify Lenins assertion.;3. Lets consider the effects of inflation in an economy composed only of two people;Bob, a bean farmer, and Rita, a rice farmer. Bob and Rita both always consume equal;amounts of rice and beans. In 2000, the price of beans was $1, and the price of rice was;$3.;(a) Suppose that in 2001 the price of beans was $2 and the price of rice was $6. What;was inflation? Was Bob better off, worse off, or unaffected by the changes in prices?;What about Rita?;(b) Now suppose that in 2001 the price of beans was $2 and the price of rice was $4.;What was inflation? Was Bob better off, worse off, or unaffected by the changes in;prices? What about Rita?;(c) Finally, suppose that in 2001 the price of beans was $2 and the price of rice was;$1.50. What was inflation? Was Bob better off, worse off, or unaffected by the changes;in prices? What about Rita?;(d) What matters more to Bob and Ritathe overall inflation rate or the relative price of;rice and beans?.;4. Explain whether each of the following events shifts the short-run aggregate-supply;curve, the aggregate- demand curve, both, or neither. For each event that does shift a;curve, use a diagram to illustrate the effect on the economy.;(a) Households decide to save a larger share of their income.;(b) Florida orange groves suffer a prolonged period of below-freezing temperatures.;(c) Increased job opportunities overseas cause many people to leave the country.;5. For various reasons, fiscal policy changes automatically when output and;employment fluctuate.;(a) Explain why tax revenue changes when the economy goes into a recession.;(b) Explain why government spending changes when the economy goes into a;recession.;(c) If the government were to operate under a strict balanced-budget rule, what would;it have to do in a recession? Would that make the recession more or less severe?;6. The Economist periodically analyzes purchasing-power parity for several countries;using the price of a Big Mac. Here are data for a few countries (July 22, 2010);(a) For each country, compute the predicted exchange rate of the local currency per;U.S. dollar. How well does the theory of purchasing-power parity explain exchange;rates?;(b) According to purchasing-power parity, what is the predicted exchange rate between;the South Korean won and the Japanese Yen? What is the actual exchange rate?;(c) Which of these countries offers the cheapest Big Mac? Why do you think that might;be the case?;Country;Price of Big Mac;USA;China;Euro Area;Hong Kong;Hungary;Japan;Malaysia;Peru;$ 3.73;Yuan 13.2;Euro 3.38;HK$ 14.8;Forint 740;Yen 320;Ringgit 7.05;New Sol 10;Predicted;Exchange rate;*;Actual exchange rate;1;$/$;6.6575 Yuan / $;0.7622;e/$;7.7802 HK$ / $;212.701 Forint / $;82.9747 yen / $;3.1393 Ringgit / $;2.8585 New Sol / $;Singapore;South Korea;Taiwan;Thailand;The end.;S$ 4.23;Won 3400;NT$ 75;Baht 70;1.3021;1160.77;30.4850;30.3045;S$ / $;Won / $;NT$ / $;Baht / $

 

Paper#30598 | Written in 18-Jul-2015

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