Money demand is

 

1) Money demand is

M^d/P=500+0.2Y-1000i.

a) Suppose that P = 100, Y = 1000, and i = 0.10. Find real money demand, nominal money demand, and the velocity of money.

b) Suppose the price level doubles to 200. Find real money demand, nominal money demand, and the velocity of money.

c) How is the velocity of money affected by an increase in the price level, an increase in real income, and an increase in nominal interest?

2) Consumer expenditures on durable goods such as cars and furniture, as well as purchases of new houses, fall much more than expenditures on nondurable goods and services during most recessions. Why do you think that is?

3) It has been argued that the stock market predicts recessions. Using quarterly data since 1961, plot the real value of the stock market index (the S&P 500 in the last day of the quarter divided by the GDP deflator at that time). Draw in the times of business cycle peaks and troughs. Do you find the stock market to be a good economic forecaster? Data on the S&P 500 can be obtained from finance.yahoo.com. You should use the adjusted closing price.

4) Desired consumption and investment are

C^d=4000-4000r+0.20Y

I^d=2400-4000r.

Y is real GDP and r is the real interest rate. Government purchases G = 2000.

a) Find an equation relating desired national saving Sd to r and Y.

b) What value of the real interest rate clears the goods market when Y = 10000? When Y = 12000? Graph the IS curve.

c) Government purchases rise to 2400. How does this change the equation for national saving in (a)? What value of r clears the goods market if Y = 10000? How is the IS curve affected by the increase in G?

5) The real money demand function is”

M^d/P=3000+0.1Y-10000i

wherei is the nominal interest rate. Assume the money supply is M = 6000, P = 2.0, and expected inflation is ?e = 0.02.

a) What is the real interest rate r that clears the asset market when Y = 8000? When Y = 9000? Graph the LM curve.

b) Repeat (a) for M = 6600. How does the LM curve compare with the LM curve in (a)?

c) Repeat (a) for ?e = 0.03. Compare the LM curve in this case with the LM curve in (a).

6) The full-employment line for the economy is Y = 1000. Desired consumption and desired investment are

C^d=200+0.8(Y-T)-500r

I^d=200-500r.

Government purchases are G = 196, and taxes are

T = 20 + 0.25Y.

Money demand is

M^d/P=0.5Y-250(r+p^e ).

Expected inflation is ?e = 0.1 and the nominal supply of money is M = 9890.

a) Under full employment, what are the general equilibrium values of the real interest rate, price level, consumption, and investment?

b) Suppose that government purchases are increased to G = 216. How do the answers to (a) change?

7) The production function in an economy is

Y = A(5N? 0.0025N2),

whereA is productivity. The marginal product of labor is

MPN = A(5 ? 0.0050N).

Suppose that A = 2. The labor supply curve is

Ns = 55 + 10(1 ?t)w,

wherew is the real wage and t = 0.5 is the tax rate on wage income.

Desired consumption and investment are

Cd = 300 + 0.8(Y?T) ? 200r

Id = 258.5 ? 250r.

Taxes and government purchases are

T = 20 + tY

G = 50

Money demand is

M^d/P=0.5Y-250(r+p^e ).

The expected rate of inflation is ?e = 0.02 and the nominal money supply is M = 9150.

a) What are the full-employment levels of the real wage, employment, and output?

b) Find the IS curve. What are the full-employment values of the real interest rate, consumption, and investment?

c) Find the LM curve. What are the full-employment value of the price level?

d) Suppose government purchases increase to G = 72.5. Assuming the price level is fixed, what are the general equilibrium values of the real wage, employment, output, the real interest rate, consumption, investment?

e) In the long run, the economy returns to full employment? What are the general equilibrium values of the real wage, employment, output, the real interest rate, consumption, investment, and the price level?

 
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