1. What is velocity if GDP = $8 trillion and M2 = $2 trillion?M
MV = PY so V = PY/M = 8/2 => velocity is 4
2. Given the following figures:
currency: $200
checking accounts: $800
savings accounts: $3000
value of stocks and bonds: $56,000
a. M1= currency + demand deposits = $1000
b. M2= M1 + time deposits = $4000
3. If the reserve requirement is 10%, what would be the impact of $2 million open market purchase?
money multiplier = 1/reserve req = 1/.10 = 10
purchase increases reserves by $2 million
deposit expansion process results in an increase in the
money supply of $20 million
4. If lenders require a 4% real rate of return, what would the nominal interest rate be if the expected inflation rate is 5%?
Fisher effect: nominal interest = real interest + inflation rate = 4+5 = 9%
5. Given these levels of spending
C = 500
I = 100
G = 100
Ex = 10
Im = 11
a. what is GDP?
Y=C+I+G+Ex-Im = 699
b. Is there a trade deficit or surplus?
Exports < Imports, trade deficit
6. If the money supply is $2 trillion and velocity = 4, What is nominal GDP?
$8 trillion
7. If the MPC = 2/3, what is the multiplier?
3
8. Use the following model to determine short run National Income
C = 10 + 7/8 Y
I = 20
G = 15
Ex = 3
Im = 4
Equilibrium Income = 352
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