· The minimum amount of words to be used is 1000 and the maximm is 1500
· You may want to include images/graphics etc. (for example from their website) to make your reasoning and argumention more visual and explicative
· Font: Arial. Size: 12,5pts. Line spacing: 1,5. Text align: Justified.
· Appendices and References, do not count towards the final wordcount but are strongly recommended (referencing websites, articles, books etc.)
· The in-text References and the Bibliography have to be in Harvard’s citation style.
1. (25%) The economy is in recession. The government knows that shifting the AD curve rightward by $200b would end the recession.
a. If MPC = .7 and there is no crowding out, how much should Congress increase G to end the recession?
b. Explain what is the crowding out effect. Use graphs.
2. (25%) For each of the events below (A,B,C),
- determine the short-run effects on output
- determine how the Fed (or Central Bank) should adjust the money supply and interest rates to stabilize output
A. Congress tries to balance the budget by cutting govt spending.
B. A stock market boom increases household wealth.
C. War breaks out in the Middle East, causing oil prices to soar.
3. (25%) Suppose that the reserve requirement for checking deposits is 5 percent and that banks do not hold any excess reserves.
1. If the Fed sells $2 million of government bonds, what is the effect on the economy’s reserves and money supply?
2. Now suppose that the Fed lowers the reserve requirement to 2.5 percent but that banks choose to hold another 5 percent of deposits as excess reserves. Why might banks do so? What is the overall change in the money multiplier and the money supply as a result of these actions?
4. (25%) Suppose that this year’s money supply is $150 billion, nominal GDP is $8 billion, and real GDP is $4 billion.
a. What is the price level? What is the velocity of money?
b. Suppose that velocity is constant and the economy’s output of goods and services rises by 5 percent each year. What will happen to nominal GDP and the price level next year if the Fed keeps the money supply constant?
c. What money supply should the Fed set next year if it wants to keep the price level stable?
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