Problem 8

A

. Calculate the currency-to-deposit ratio (cr), and the money multiplier (m) given the following values:

rr = 0

.20 C = $320 billion D = $1,000 billion

B

. Calculate total required reserves (RR), total actual reserves (AR) and the monetary base (MB)

.B

. Now assume the FED lowers the required reserve ratio to 0

.10

. Calculate the new money multiplier (mm’) and the new money supply (M1)

.C

. Calculate the new level of deposits (D’) and currency in circulation (C)

.D

. Calculate the new level of required reserves (RR’) and excess reserves (ER’)

.Problem 9

Consider an economy with no income taxes, and where the mpc (c) = 0

.75

.A

. What is the value of the multiplier associated with autonomous spending?

B

. How much will output in this economy change if government expenditures are decreased by$500?

C

. How much will output in this economy change if government transfers are decreased by $500?

D

. What explains the difference in your answers (if any) between part (b) and part (c) of this problem?

Problem10

Now suppose that in the economy described in problem #9 above the government imposes a proportional income tax, t = 1/4 (or, t = 0

.25) and the mpc remains 0

.75

.A

. What is the value of the multiplier now?

B

. How much will output in this economy change if government spending decreases by $500?

C

. How will the change in government spending in this model affect the budget surplus or deficit(that is, what is the change in BD or BS) due to the $500 decrease in government spending?