QUIZ 3: Macro – Fall 2014
Name: ______________________
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Tuesday p.m. Wednesday a.m.
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Harper
Gleacher Exchange Student
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Questions 1 (11 points total)
For this example, we will assume the following (unless told otherwise). Banks only hold
required reserves (m = m*) and no one in the economy holds cash (TC = 0). Let’s assume
the required reserve ratio is 5%. Suppose the monetary base (initially) is $600 billion. For
simplicity, let’s assume the economy is closed such that NX = 0 (all money is contained
within the domestic economy). Assume that banks can always adjust their loan holdings at
will. Finally, assume that the Fed only acts when I tell you they act
Note: These questions are essentially conceptual. So, we will grade them as either correct (2
or 3 points) or wrong (0 points). No partial credit will be given. Put answers in the box.
A. Given the above information, what is the value of total deposits (TD) in this
economy? (2 points)
TD =
B. Consider the initial scenario. Suppose there was one person (me) who wants to
remove $10,000 from the banking system and hold it as cash. All other agents
always hold their money within the banking system. What happens to the money
supply (MS) when I remove $10,000 from the banking system and hold it as cash?
(3 points)
ΔMS =
C. Return to the initial scenario (TC always equals zero). Suppose Congress and the
President decide that they want to increase transfer payments by $500 million.
Suppose they decide to do this by funding the transfers by issuing new debt. Suppose
the new debt is purchased by private citizens. How much will total loans (TL)
change when the Congress and Presidents sell $500 million of new bonds purchased
by private citizens? (3 points)
ΔTL =
D. Return to the initial scenario (TC always equals zero and monetary base equals $600
billion). Suppose the Fed decides to raise the required reserve ratio (m) from 5% to
10% (the new m is 10%). How much will total reserves (TR) change when the Fed
increases the required reserve ratio from 5% to 10%? (3 points)
ΔTR = 0
Question 2 (9 points total – 3 points each)
Circle the true answer to each of the question stems. When answering the questions, use the
models built in class. For example, we will assume PIH non-Ricardian consumers, K is
fixed, NX = 0, etc. Finally, assume all exogenous variables are fixed unless I tell you
otherwise (G, taxes, TFP, etc.). Again, all the standard assumptions will hold.
For the question, let’s use the notation “s.e.” to mean substitution effect on labor supply and
“i.e.” to mean income effect on labor supply. Please read closely because I change the order
of variables from question to question.
A. Which of the following will unambiguously decrease structural deficits?
i. A permanent increase in TFP (A) with s.e. greater than i.e.
ii. A permanent increase in TFP (A) with s.e. equal to i.e.
iii. Both (i) and (ii) are true.
iv. Neither (i) nor (ii) are true.
B. Which of the following will unambiguously decrease structural deficits?
i. A permanent decrease in government spending (G) with s.e. greater than i.e.
ii. A permanent decrease in government spending (G) with s.e. equal to i.e.
iii. Both (i) and (ii) are true.
iv. Neither (i) nor (ii) are true.
C. Which of the following will unambiguously decrease structural deficits?
i. A permanent increase in labor income taxes (tn) with i.e. greater than s.e.
ii. A permanent increase in labor income taxes (tn) with i.e. equal to s.e.
iii. Both (i) and (ii) are true.
iv. Neither (i) nor (ii) are true.