1. List whether the following items would be included as part of the CPI, GDP deflator, neither, or both.

a. An automobile made in Japan that is purchased by a U.S. consumer

b. Machinery made in the U.S. purchased by a U.S. manufacturer

c. Tomatoes grown in California purchased by a U.S. consumer

2. Use the following information to answer question 2

                                   2007                2014

MI                               1,375                    2,545

Real GDP                      14,830                 16,090

GDP deflator                 97.3                    108.3

a. Calculate the velocity of money in 2007 and 2014

b. Suppose the velocity of money remained constant between 2007 and 2014 and that real GDP in 2014 was equal to its actual value. What would be the value of the GDP deflator?

c. What was the value of nominal GDP in 2007 and 2014?

3 Use the following information to answer question 4.

A M = 8, % AV = - 2 , % a Y = 2 , expected inflation rate = 3, ex ante real interest rate = 1.

a. Calculate the inflation rate

b. Calculate the nominal interest rate

c. Calculate the ex post real interest rate

d. Suppose the velocity of money was constant but all the other variables at the beginning of the problem were the same. What effect, if any, would this have on the inflation rate and the nominal interest rate?

e. Bonus. Assume a saver deposits $100 in a savings deposit. Given the numbers above, what will be the real value of her savings a year later?

4. Use the information below to answer question 4:

Commercial Banks
    Assets          Liabilities.
Reserves 400    Deposits 2000
Loans 1,600      Equity 500
Securities 500

   Federal Reserve
    Assets          Liabilities.
Securities 900   Currency 500
                      Reserves 400
     Public
    Assets           Liabilities.
Deposits 2,000  Loans 1,600
Currency 500 Net Worth 900

Assume that the required reserve ratio (ratio of reserves to deposits) is .1

Calculate the following: (5 points each)
a. excess reserves
b. the monetary base
c. Ml
d. the money multiplier
e. leverage
f. Suppose the monetary base remained the same and the currency-deposit ratio increased to .5. What would be the value of MI?
g. Suppose the monetary base remained the same and that there were no excess reserves. What would be the value of M I? (Assume the same currency-deposit ratio as in the beginning of the problem.)
h. Show the effect on the balance sheets of a $100 open market purchase of securities by the Federal Reserve.
i. Bonus. Calculate the effect of the $100 open market purchase of securities on currency and deposits after the completion of the money multiplier process.

5. Answer question 6 on page 129 of the textbook. It is reproduced below.

6. in each of the following scenarios, explain and categorize the cost of inflation.

a. Because inflation has risen, the L.L. Bean Company decides to issue a new catalog quarterly rather than annually.

b. Grandma buys an annuity for $100,000 from an insurance company, which promises to pay her S10,000.3 year for the rest of her life After buying it, she is surprised that high inflation triples the price level over the next few years.

c. Maria lives in an economy with hyperinfla¬tion. Each day after being paid, she runs to the store as quickly as possible so she can spend her money before it loses value.

d. Warren lives in an economy with an infla-tion rate of 10 percent. Over the past year, he earned a return of 350,000 on his million-dollar portfolio of stocks and bonds. Because his tax rate is 20 percent, he paid $10,000 to the government.

e. Your father tells you char when he was your age, he worked for only $3 an hour. f le sug¬gests that you are lucky to have a job that pays $7 an hour.