Econ Homework

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Economics

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DO THREE version of this homework. (correct answers make it for three people)

Deliver THREE single doc.

DO THREE version of this homework. (correct answers make it for three people)

Deliver THREE single doc.

DO THREE version of this homework. (correct answers make it for three people)

Deliver THREE single doc.

DO THREE version of this homework. (correct answers make it for three people)

Deliver THREE single doc.

DO THREE version of this homework. (correct answers make it for three people)

Deliver THREE single doc.

DO THREE version of this homework. (correct answers make it for three people)

Deliver THREE single doc.

DO THREE version of this homework. (correct answers make it for three people)

Deliver THREE single doc.

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ECN 101 UC Davis Fall 2018 Homework #2 Dr. Derek Stimel Due Friday November 2 by 5 PM Assignment must be uploaded as a Canvas as a single pdf file or MS Word. It is ok to scan a hand-written document, but scan to pdf only (no jpeg or camera photo, etc.) Note: “Briefly explain” means a sentence or two. 1) a) b) c) d) 2) Suppose in an economy 4% of workers lose their jobs each month while about 92% of unemployed workers found a job. What is the natural rate of unemployment for this economy? [Note: this is not too far off of recent US numbers]. Suppose for some reason the rate of finding a job were to fall from 92% to 82%, how would this change your answer to part a). You read a news report that says number of employed is 150 million people. What must be the number of unemployed and the labor force for this economy (use the numbers from part a)? You read a news story that explains the government is decreasing the generosity of unemployment benefits. Briefly explain how this will affect the natural rate of unemployment. Suppose the following bank balance sheet represents all banks in a small country. Reserves Loans Securities Assets $160 Million $320 Million $120 Million Liabilities + Owner’s Equity Deposits $400 Million Debt $ 120 Million Bank Capital (Owner’s Equity) $ 80 Million Assume that banks hold no excess reserves and that the amount of loans in the economy represents the total amount of currency in the hands of the non-bank public. a) b) c) d) What is the money-multiplier in this small island economy? If the country’s central bank buys $25 million in bonds from this bank, what will be the money supply (M1)? If you were told that these banks are actually holding $60 million in excess reserves, what must be the reserve requirement? Suppose the government decides that banks must maintain a leverage ratio of 5 to 1 or better. Using the original balance sheet provided, what, if anything, would these banks need to do? Briefly explain. 3) For each of the following, evaluate whether bank lending would increase/decrease/stay the same as a result of the event given. Briefly explain your reasoning for each. a) b) c) d) The Federal Reserve increases the discount rate. The Federal Reserve increases the interest on reserves. Banks decide to increase the amount of excess reserves they hold as a proportion of assets. Households decide to hold less currency as a proportion of their liquid assets. Page 1 of 2 4) Suppose that velocity is constant, nominal GDP is growing by 3% per year, real GDP growth rate is 0%, and the nominal interest rate is 5%. Using the quantity theory of money, the fisher equation, and the classical dichotomy, answer the following questions about the long-run. a) b) c) d) What is the inflation rate? What is the real interest rate. What is the money growth rate? Suppose that the Central Bank (i.e. the Federal Reserve) would like inflation to be 2% in this economy. Based on the information we have, what would they need to set the money growth rate to in order for inflation to be the 2% target? Assume the Central Bank has set the money growth rate in order to achieve its 2% inflation target as in part d). What is the nominal interest rate as a result of this? Assume the Central Bank has set the money growth rate in order to achieve its 2% inflation target as in part d). What is the real interest rate as a result of this? e) f) 5) Suppose a simple money economy can be described by the following equations. MV = PY Quantity Equation i = Eπ + r Fisher Equation (M/P)d =0.3Y – 20i Real Money Demand (M/P)s = 5 Real Money Supply If real GDP is 20… a) what must the equilibrium nominal interest rate be? b) what must the velocity of money be? c) Suppose the quantity theory of money and classical dichotomy is true. If expected inflation increases by 2% or 0.02, what happens to the price level in this model? 6) a) b) c) Suppose an economy is in its long-run equilibrium and the real money demand function for the economy is (M/P)d =0.2Y. Now suppose suddenly money demand becomes (M/P)d =0.4Y. Draw a graph and show the initial long-run equilibrium and then show the short-run equilibrium that would results from this change in money demand [Hint: You are drawing the graph from Chapter 10 but think about how this money demand change affects velocity from Chapter 5.] Assuming policymakers take no action, how would the economy transition back to the long-run equilibrium? Show this on your graph from part a). Briefly explain, could monetary policy change the money supply to offset this change in money demand? If so, how would they do that? Page 2 of 2
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Running head. ECONOMIC QUESTIONS

Economics questions
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Running head. ECONOMIC QUESTIONS

Question one

(a) Unemployment rate (u) varies with job separation rate (s) and job finding rate (f)
according to the equation below..

U/L = (s/s+f)

In this case s = 0.04 and f = 0.92

The rate of unemployment u = (0.04/0.04+0.92)

= 0.0417%

(b) the new rate as a result of change from 92% to 82% would be;
U/L = (s/s+f)
0.04/0.04 +0.82
= 0.0465%
(c) Let the number of those who are unemployed be N. Labor force is the summation of
unemployed and employed. Unemployment rate is the percentage of labour force
unemployed

0.0417 = N/ (150+N) * 100
N = 0.0625 million
The number of unemployed is 0.0625 million people
(d) The rate of unemployment will decrease if the government reduces benefits such as
unemployment insurance.

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Running head. ECONOMIC QUESTIONS

Question t...


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