Macro Econ;Topic 11 Public Finances

Macro Econ
PROBLEM SET # 4 (Topics 11-14)

Topic 11 Public Finances

1. Complete the following table:

Year Federal Budget Receipts Federal Budget Spending GDP Deficit as a
% of GDP
1 2,900.0 3,420.0 15,470.0 _____?
2 2,945.0 3,520.0 ______? -3.05%
3 2,970.0 ______? 16,452.1 -3.44%
6 ______? 3,600.0 17,500.0 -3.10%

2. Suppose in Fiscalville there is no tax on the first $10,000 of income, but a 20 percent tax on earnings from $10,001-20,000 and a 30 percent tax on income from $20,001 and $30,000. Any income above $30,000 is taxed at 40 percent. If your income is $50,000, how much in taxes will you pay? Determine your average tax rate. Is it a progressive tax? Explain.

Topic 12 Money & Banking
3. a. Can M1 fall as M2 rises? Explain your answer.
b. Can M1 rise without M2 rising too? Explain your answer.
4. a. Suppose that $10,000 in new dollar bills (never seen before) falls magically from the sky into the hands of Joanna. Assuming no cash leakage, what are the minimum increase and the maximum increase in the money supply that may result? Assume the required- reserve ratio is 10 percent.
b. Suppose Joanna receives $10,000 from her friend Ethel and deposits the money into a checking account. Ethel gave Joanna the money by writing a check on her checking account. Would the maximum increase in the money supply still be what you found it to be in part a (above) where Joanna received the money from the sky? Explain your answer.

5. Assume that the following data characterize a hypothetical economy: money supply = $200 billion; quantity of money demanded for transactions = $150 billion (constant); quantity of money demanded as an asset = $10 billion at 12 percent interest, increasing by $10 billion for each 2 percentage point fall in the interest rate.
a. What is the equilibrium interest rate?
b. At the equilibrium interest rate, what are
i) the quantity of money supplied,
ii) the total quantity of money demanded,
iii) the amount of money demanded for transactions, and
iv) the amount of money demanded as an asset?
.

Topic 13 Monetary Policy

6. Suppose that a risk-free investment will make three future payments: $100 in one year, $100 in two years, and $100 in three years. If the Federal Reserve has set the risk-free interest rate at 8 percent, what is the proper current price of this investment? (A hint will be given in class)

Topic 14 International Finance

7. Assume a system of flexible exchange rates between Mexico and the United States. Indicate whether each of the following would cause the Mexican peso to appreciate or depreciate:
a. The United States unilaterally reduces tariffs on Mexican products.
b. Mexico encounters severe inflation.
c. Deteriorating political relations reduce American tourism in Mexico.
d. The United States’ economy moves into a severe recession.
e. The U.S. engages in a high interest rate monetary policy.
f. Mexican products become more fashionable to U.S. consumers.
g. The Mexican government encourages U.S. firms to invest in Mexican oil fields.
h. The rate of productivity growth in the United States diminishes sharply.
8. The following foreign exchange information appeared in a newspaper:
U.S. $ EQUILAVENT CURRENCY PER U.S. $ Thursday Friday Thursday Friday
Russia (ruble) 0.0318 0.0317 31.4190 31.529
Brazil (real) 0.3569 0.3623 2.8020 2.7601
India (rupee) 0.0202 0.0208 48.9100 47.8521
(a) Between Thursday and Friday, did the U.S. dollar appreciate or depreciate against the Russia ruble?
(b) Between Thursday and Friday, did the U.S. dollar appreciate or depreciate against the Brazilian real?
(c) Between Thursday and Friday, did the U.S. dollar appreciate or depreciate against the Indian rupee?
ANSWER SHEET
Print the answer sheet as is (consists of two pages). Do not attach the question sheet. Show graphs on graph paper only (attach). You are encouraged to show calculations, either near the answer, on the back of the page (preferred), or on an attached sheet of paper (clean edges)

Q#1. Note: Your answer must be to at least 2 decimal points!

Year Federal Budget Receipts Federal Budget Spending GDP Deficit as a
% of GDP
1 2,900.0 3,420.0 15,470.0 _____?
2 2,945.0 3,520.0 ______? -3.05%
3 2,970.0 ______? 16,452.1 -3.44%
6 ______? 3,600.0 17,500.0 -3.10%

Q#2. Total tax = $ ___________ Average tax rate = ______%

Q#3. a. Yes or No: _______ Explanation: __________________________________________

___________________________________________________________________________

b. Yes or No: _______ Explanation: __________________________________________

___________________________________________________________________________

Q#4 a. Minimum Increase: $_______________ Maximum Increase: $_______________

b. Yes or No: _______ Explanation: __________________________________________

_________________________________________________________________________________

Q#5. a. equilibrium interest rate = ________%

b. At equilibrium:

i) quantity of money supplied = $________ ii) asset demand for money = $________

iii) transaction demand for money = $ _______ iv) total quantity of money demanded = $_______

Q#6. Proper current price of investment = $__________________

Q#7. Appreciates or Depreciates?

a. ____________ b. _____________ c. _____________ d. ________________

e. ____________ f.. _____________ g. _____________ h. ________________

Q#8. Appreciated or Depreciated?

a. _______________ b. ________________ c. ____________________

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