macroeconomic fiscal and monitory policy

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  1. Assume the following modified (4-sector) Keynesian model:
    Y = C + I + G + X – IM … equilibrium condition in a 4-sector model where: C = 150 + 0.9DI … consumption function I = 150 … autonomous investment G = 100 … autonomous government spending X = 100 … autonomous exports IM = 200 … autonomous imports
    And also: DI = Y – T + Tr T = 0 … autonomous taxes Tr = 0 … autonomous transfer payments YF = 5000 … full-employment Y
    a. Suppose that full-employment (YF) equals $5000. Is there a recessionary or inflationary output gap?
    b. How much is the gap equal to?
    c. Suppose the government chooses to eliminate the gap by using expansionary fiscal policy (i.e., decreasing taxes specifically). Given the numbers above, by how much would taxes need to decrease to achieve the goal of full-employment?
  2. Use the following information to answer the question below. Assume the national debt equals $0 prior to Year 1.
    Government Spending Transfer Payments Tax Revenue
    Year 1 $500 $200 $900 Year 2 $600 $200 $800 Year 3 $600 $300 $800 Year 4 $700 $300 $900 Year 5 $700 $400 $1000 Year 6 $800 $400 $1000 Year 7 $800 $500 $1000
    a. What is the federal budget position in year 4?
    b. What is the value of the national debt at the end of year 7?
  3. Use the AD/AS model to illustrate the following. Draw 7 graphs by hand. Show how the AD or the AS curve shift and in what direction (left or right). Also state (and show) what happens to equilibrium real GDP (Y), unemployment, and the equilibrium price level.
    a. an increase in government spending and/or transfer payments
    b. restrictive fiscal policy
    c. expansive monetary policy
    d. increase in investment according to Keynesians
    e. increase in investment according to supply-side economists
    f. self-correcting mechanism for an recessionary gap
    g. a stock market crash
  4. If the aggregate supply (AS) curve is very steep, will expansionary fiscal or monetary policy have a bigger effect on real GDP or the price level? Draw a graph to support your answer to this question.
  5. Suppose you transfer $200 from your checking account to your savings account. With this transaction, will M1 increase, decrease, or stay the same? … will M2 increase, decrease, or stay the same?
  6. Name three ways that the Federal Reserve can increase the growth rate of the money supply. Be specific.
  7. Who is the current Chair of the Fed? What city is the location of the Fed headquarters?
  8. Use the bank information below to answer the questions below.
    Given an initial deposit of $200, and assuming that required reserve ratio equals 5%, and that bank customers do not hold any currency, fill out the following chart for three rounds of deposits.
    Round Deposits Required Reserves Excess Reserves Loans
    1 $200
    2
    3     _
    a. What is the amount of required reserves in Round #2?
    b. What is the amount loaned out by this bank in Round #3?
    c. What is the value of the “oversimplified” money multiplier?
    d. If the money creation process continues to its limit, by how much will the money supply ultimately change? (Hint: Use the money multiplier process formula to answer this question.)
    e. If the above bank borrowed $5000 from the Fed, by how much more could it increase its loans to customers?
  9. What’s the difference between the “crowding-out” and “crowding-in” effect? Which explanation makes more sense in a recessionary period?
  10. In our current economy, what monetary policy should the Fed be pursuing and why? Be specific.
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