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ECONTWO: EXERCISE 2

NAME: ______________________________

SECTION: ____________

____________________________________________________________________________
1. If excess reserves are zero and the BSP increases the required reserve ratio from 5 percent to
10 percent, then the money multiplier (increases, decreases) decreases from 20 to 10.
2. If the required reserve ratio is 8 percent, banks do not hold excess reserves, and people do not
hold currency, then when the Fed purchases $20 million of government bonds, bank
reserves (increase, decrease) increase by $20 million and the money supply eventually
(increases, decreases) increases by $250 million .
3. If the reserve ratio is 15 percent, and banks do not hold excess reserves, and people hold only
deposits and no currency, then when the Fed sells $65 million worth of bonds to the public,
bank reserves (increase, decrease) decrease by $65 million and the money supply
eventually (increases, decreases) decreases by $433.3 million.
4. An increase in the discount rate will (increase, decrease) decrease bank borrowings from the
central bank, (increase, decrease) decrease bank reserves, and (increase, decrease) decrease
money supply.
5. A decrease in the discount rate will (increase, decrease) increase bank borrowings from the
central bank, (increase, decrease) increase bank reserves, and (increase, decrease) increase
the money supply.
6. An increase in the interest rate paid by the central bank on bank reserves will (increase,
decrease) increase the excess reserves of banks, (increase, decrease) increase the reserve
ratio of banks, and (increase, decrease) decrease money supply.
7. A decrease in the interest rate paid by the central bank on bank reserves will (increase,
decrease) decrease the excess reserves of banks, (increase, decrease) decrease the reserve ratio
of banks, and (increase, decrease) increase money supply.
II. Money Growth and Inflation
1.If M = 3,000, P = 2, and Y = 12,000, then the velocity of money is equal to 8.
2. Based on the assumptions of the quantity equation, if M = 100, V = 3, and Y = 200, then P =
1.5 and nominal GDP = 300. If M increases to 200 (a 100 percent increase) and V is a
constant, then real GDP, Y, will be equal to 200, the price level P will increase to 3 or a 100
percent increase and nominal GDP will be equal to 600 or a 100 percent increase.
3. If the nominal interest rate is 7 percent and expected inflation is 4.5 percent, then the expected
real interest rate is 2.5 percent.
4. If the real interest rate is 6 percent and the price level is falling at a rate of 2 percent, the
nominal interest rate is 4 percent.

5. You put money into an account that earns a 8 percent nominal interest rate. The inflation rate is
3 percent, and your marginal tax rate is 25 percent. What is your after-tax real rate of
interest? 3 percent
III. Open Economy Macroeconomics: Basic Concepts
1. If domestic residents of Italy purchase 1.2 billion euros of foreign assets and foreigners purchase 1.5
billion euros of Italian assets, then Italys net capital outflow is -.3 billion euros, capital is flowing
(into, out of) into Italy and the country must have a (trade surplus, trade deficit) trade deficit equal
to .3 billion euros. Domestic investment, I, in Italy must be (greater, less) greater than national
saving and total domestic spending (C+I+G) must be (greater, less) greater than income Y.
2. If a county has 25 billion euros of imports, 15 billion euros of exports, and sells 20 billion euros of
assets to foreigners, how many foreign assets do domestic residents purchase? 10 billion euros
3. Ann, a U.S. citizen, buys euros from a US money changer to purchase a bond issued by a Spanish
company. This transaction (increases, decreases, does not change) does not change US net capital
outflow.
4. If a bushel of wheat costs $6.40 in the United States, costs 40 pesos in Mexico, and the nominal
exchange rate is 10 pesos per dollar, then the real exchange rate is 1.60 bushels of Mexican wheat
per bushel of US wheat. US wheat is (cheaper, more expensive) more expensive than Mexican
wheat.
5. Suppose that the nominal exchange rate is 80 yen per dollar, that the price of a basket of goods in the
U.S. is $500, and the price of a basket of goods in Japan is 50,000 yen. Suppose that these values
change to 100 yen per dollar, $600, and 70,000 yen. Then the US real exchange rate would
(depreciate, appreciate) appreciate. This would cause US net exports to (increase, decrease)
decrease.
IV. A Macroeconomic Theory of the Open Economy
1. A country has national saving of $70 billion, government expenditures of $20 billion, domestic investment of $30
billion, and net capital outflow of $40 billion. What is its supply of loanable funds? $70 billion
2. A country has national saving of $60 billion, government expenditures of $30 billion, domestic investment of $40
billion, and net capital outflow of $20 billion. What is its demand f or loanable funds? $60 billion
3. A country has domestic investment of $100 billion. Its citizens purchase $500 billion of foreign assets and
foreign citizens purchase $300 billion of its assets. What is national saving? $300 billion
4. A country has I = $200 billion, S = $400 billion, and purchased $600 billion of foreign assets, how many of its
assets did foreigners purchase? $400 billion
5.(Bad question. The shift in the demand curve for pesos to the right or to the left depends on your answer to
the previous blanks. Whether net exports increased or decreased) In the open economy macroeconomic
model, the amount of pesos (demanded, supplied) demanded in the market for foreign-currency exchange at a
given real exchange rate increases if Philippine exports (increase, decrease) increase or Philippine imports
(increase, decrease) decrease. In this case, the (demand , supply) demand curve for pesos shifts to the (right,
left) right.

6.(Bad question. The shift in the supply curve for pesos to the right or to the left depends on your answer to
the previous blanks. Whether net capital outflow increased or decreased) In the open economy
macroeconomic model, the amount of pesos (demanded, supplied) supplied in the market for foreign-currency
exchange at a given real exchange rate increases if Philippine net capital outflow (increases, decreases)
increases.. In this case, the (demand , supply) supply curve for pesos shifts to the (right, left) right.
7. In the open-economy macroeconomic model, if the supply of loanable funds increases, the supply curve of
loanable funds shifts to the (right, left) right, interest rates will (rise, fall) fall, net capital outflow will
(increase, decrease) increase, supply of pesos will (increase, decrease) increase, the supply curve of pesos
shifts to the(right, left) right, the peso (appreciates, depreciates) depreciates and net exports (increase,
decrease) increase.
8. In the open-economy macroeconomic model, if the supply of loanable funds decreases, the supply curve of
loanable funds shifts to the (right, left) left, interest rates will (rise, fall) rise, net capital outflow will
(increase, decrease) decrease, supply of pesos will (increase, decrease) decrease, the supply curve of pesos
shifts to the(right, left) left, the peso (appreciates, depreciates) appreciates and net exports (increase,
decrease) decrease.
9. (Bad question. Answer depends on what the source is of the increase in demand. If investment, the demand
curve will shift to the right but the NCO curve will not shift to the right) In the open-economy
macroeconomic model, if the demand for loanable funds increases, the demand curve of loanable funds shifts
to the (right, left) right, interest rates will (rise, fall) rise, net capital outflow curve will shift to the (right, left)
right, supply of pesos will (increase, decrease) increase, the supply curve of pesos shifts to the(right, left)
right, the peso (appreciates, depreciates) depreciates and net exports (increase, decrease) increase.
10. (Bad question. Answer depends on what the source is of the decrease in demand. If investment, the
demand curve will shift to the left but the NCO curve will not shift to the left) In the open-economy
macroeconomic model, if the demand for loanable funds decreases, the demand curve of loanable funds shifts
to the (right, left) left, interest rates will (rise, fall) fall, net capital outflow curve will shift to the (right, left)
left, supply of pesos will (increase, decrease) decrease, the supply curve of pesos shifts to the(right, left) left,
the peso (appreciates, depreciates) appreciates and net exports (increase, decrease) decrease.
11. An increase in the government budget deficit will cause the (demand, supply) supply curve of loanable funds to
shift to the (right, left) left, real interest rates will (rise, fall) rise, net capital outflow will (increase, decrease)
decrease,the supply of pesos in the foreign exchange market will (increase, decrease) decrease, the supply
curve of pesos shifts to the (right, left) left, the peso (appreciates, depreciates) appreciates and net exports
(increase, decrease) decrease.