Macroeconomics 1 - Seminar 8
07.04.2015
Miroslava Federičová
Part 1: True/False
1) If the GDP of the CR is higher than the GNP of
the CR then foreigners contribute to
production in the CR more than the Czechs
contribute to production abroad.
True
Part 1: True/False
2) If the government changes the tax code in a
way that encourages households to save
more, the supply of loans will shift to the
right, leading to a higher interest rate. (Use a
supply-and-demand diagram for loanable
funds to explain your answer)
False
3) Nominal GDP in 2012 was higher than in
2008; thus, the real output of the economy
had to grow.
False
Part 1: True/False
4) Suppose the price of fish increases, so
households now buy less fish and more
chicken. This will cause the CPI to measure
more inflation than there really is.
True
Part 1: True/False
5) Numerous students graduate from college but
cannot find work. This increases the labor
force participation, but it has no effect on
unemployment rate. (Consider the correctness
of the effects to both mentioned statistics)
False
Part 1: True/False
6) When the Central Bank adds more money to
the economy, the Money Supply curve shifts,
causing the equilibrium price level to increase.
(Use a supply-and-demand diagram to explain
your answer)
True
Part 1: True/False
7) In an economy with two labor markets – one
for manufacturing workers and one for service
workers - manufacturing workers decide to
form a union. This decision leads to decline in
equilibrium wage in service labor market.
True
Part 1: True/False
8) When the Central Bank reduces the discount
rate, the Money Supply will grow.
True
Part 1: True/False
9) When inflation turns out to be higher than
expected, borrowers will be worse off.
False
Part 1: True/False
10) Price of the non-renewable resources has to
rise in the long-term, because its
quantity/supply is running out by
consumption.
False
Part 1: True/False
Part 2: Open questions
1) Consider an economy that produces and consumes bread and
automobiles. The following table contains data for two different years.
a) Using 2000 as the base year, compute the following statistics for each
year: nominal GDP, real GDP, the price deflator for GDP, and consumer
price index (consumer basket is composed by 100 automobiles and
500,000 breads).
in 2000: nom. GDP=$10 mil. =real GDP, GDP defl.=100, CPI=100
in 2010: nom. GDP=$15,2 mil., real GDP=10 mil., GDP defl.=152, CPI=160
b) Compute the inflation rate between 2000 and 2010 using CPI and GDP
deflator and explain the difference. Using CPI it is 60% and using GDP def. It
is 52%.
c) What is the average annual growth rate in nominal and real GDP between
2000 and 2010? The average annual growth rate in nominal GDP is 4.3%
and in real GDP is 0.
d) Suppose that the average annual population growth was 3%. How much did
the real GDP per person change from 2000 to 2010? The real GDP per
person in 2010 is 0.74 times the real GDP per person in 2000.
2000 2010
Good Quantity Price Quantity Price
Automobiles 100 $ 50,000 120 $ 60,000
Bread 500,000 $10 400,000 $ 20
2) Suppose the government borrows $20 billion more next
year.
a) Use a supply-and-demand diagram of loanable funds to
analyze this policy. Does the interest rate rise or fall?
Decline in national saving leads to the shift of supply curve to the
left and causes the real interest rate to increase.
b) What happens to investment? To private saving? To public
saving? To national saving? Investment decrease, Private saving
increase less than $20 billion, Public saving decrease by $20 billion,
National saving decrease
c) Suppose households believe that greater government
borrowing today implies higher taxes to pay off the
government debt in the future. What does this belief do to
private saving and the supply of loanable funds today? Does it
increase or decrease the effects you discussed in parts (a) and
(b)? HHs will save more to be able to pay taxes tomorrow, hence
supply of loanable funds will increase, the real interest rate will
decrease, Investment and national savings goes up. It will reduce
the effects from a) and b).
Part 2: Open questions
3) The Federal Reserve conducts a $ 10 million
open-market purchase of government bonds.
If the required reserve ratio is 10 percent,
what is the largest possible increase in the
money supply that could result? Explain. What
is the smallest possible increase? Explain.
The largest possible increase in the money supply is
$100 mil. And the lowest possible is $10 mil. (banks
put all money to reserves)
Part 2: Open questions
4) Assume that the banking system has total reserves
of $100 billion. Assume also that required reserves
are 10 percent of checking deposits and that banks
hold no excess reserves and households hold no
currency.
a) What is the money multiplier? What is the money
supply?
Money multiplier=10 and Money supply=$1000 billion
b) If the Central Bank now raises required reserves to 20
percent of deposits, what are the changes in reserves
and in the money supply?
MS=$500 billion and total reserves=$100 billion
BONUS