# econ homwork

Due Date: Wednesday July 18, 2018

Marks: 40 I will mark all questions.

Total Percentage of Final Grade: 7.5%

Late Penalty: If the assignment comes in after the start of class, a late penalty of 3 marks will be applied. For every additional 24-hour period an assignment is late, another 3 marks will be deducted. I will not be posting the answer key to Blackboard but we will review in class.
Chapter 24
1. Suppose that changes in bank regulations expand the availability of credit cards, so that people need to hold less cash. a. How does this event affect the demand for money? (2 marks)
b. If the central bank does not respond to this event, what will happen to the interest rate in the short-run? (2 marks)
c. How might the central bank react in the money market, if it wants to keep the interest rate constant? (1 mark)
d. Moving away from the situation above, consider the long-run in the money market, if the economy is growing at 1 per cent per year and the money supply is growing at 2 percent per year what do you predict will happen, all else constant. Please explain your answer. (5 marks)

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ECON 1250 (002,003 & 050) summer 2018 Teng

2. The banking system has a desired reserve ratio of 2.0% and there is a currency drain of 25%.
a. What is the money multiplier for the banking system? (2.5 marks)
The balance sheet of one of the depository institutions, The Bank of Mommies and Daddies (BMD for short) is below. b. Calculate the percentage of actual reserves BMD is holding based on the information in the balance sheet. (1.0 mark)
Balance Sheet for BMD Assets Liabilities Reserves 150 Customer Deposits 5000 Government Securities 2000 Loans 2850 Total Assets 5000 Total Liabilities 5000

c. Is BMD able to make loans to customers? If so, what is the total amount of liquidity (money) that BMD may create? Please explain your answer. (2.5 marks)
d. The Central Bank sells government security worth \$100 to this bank. Please write out the new balance sheet to record this transaction. (2.5 marks)
e. After the transaction in part d. of this question, is BMD able to make loans? If so, what is the total amount of liquidity (money) that BMD may create? Please explain your answer. (1.5 marks)

Chapter 25 Foreign Exchange Markets 3. A country such as Canada has a flexible exchange rate. The central bank, Bank of Canada, raises the bank rate. What is the effect on the foreign exchange rate? Briefly explain and draw a graph of the foreign exchange market to show the changes that occur. (10 marks)

Chapter 26 Aggregate Supply Aggregate Demand Model
4. For the next question, you are to use a graph to illustrate the change described in each part and then explain the situation in one or two sentences. You may have to go back to earlier material to find some of the answers. (Chapters 22 and chapters 23 may be helpful)
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ECON 1250 (002,003 & 050) summer 2018 Teng

a. There is an increase in human capital across the labour force. What type of change will occur and how will the aggregate supply curve(s) change? (2 marks)
b. There is rise a countryâ€™s stock market prices. What is the type of planned expenditure that will change and why? How will aggregate demand change? (2 marks)
c. For this part of the question, start with an economy in short-run macroeconomic equilibrium. Then illustrate the new short-run macroeconomic equilibrium after the rise a countryâ€™s stock market prices. (3 marks)
d. What type of output gap is present in part c of this question? (1 mark)
e. Starting from your answer in part d of this question, describe how will the economy