Assignment

1. In June 2008, a bank saw a 10% drop in assets, a 50% drop in capital, but no change in liabilities.

(a) How much was the bank‘s leverage ratio at the beginning of June 2008?

(b) How much was the bank‘s leverage ratio at the end of June 2008?

(c) In July 2008, the bank‘s assets decreased by 10%, while the bank‘s liabilities remained unchanged. What was the percentage change in the bank‘s capital?

2. Consider an economy where deposits are 60 billion pesos which constitutes 80% of the money supply. Reserves are 35 billion pesos.

(a) Calculate the currency-deposit ratio.

(b) Calculate the money multiplier.

(c) If the central bank requires each bank to keep 10% of deposits as reserves, calculate banks‘ excess reserves.

(d) If the central bank buys fi billion pesos worth of securities, calculate the per- centage change in the monetary base and the percentage change in the money supply assuming that the currency-deposit ratio and the reserve-deposit ratio stay unchanged.

3. If reserves are scarce, how would the money supply change (increase, decrease, or stay the same) and why (because of an increase, decrease, or no change in the monetary base, reserve-deposit ratio, or currency-deposit ratio) if:

(a) bank‘s deposit insurance is eliminated

(b) the central bank decreases the discount rate

(c) the central bank increases the rate it pays on bank‘s required reserves, but decreases the rate it pays on excess reserves

(d) an article reporting a significant surge in cases involving counterfeit currency becomes viral.

4. The demand for real money balances is given by (M/P) = {4Y/√(i/100)}, where the nominal interest rate s is measured in percent. At the beginning of the year, the nominal interest rate is 4%. Over the year, the money supply increases by 2%, the output increase by fi% percent, and the nominal interest rate decreases by 8 basis points.

(a) If the es ante real interest rate equals 3%, find the expected inflation at the beginning of the year.

(b) Calculate the actual inflation rate.

(c) Is it true that purchasing power was transferred from borrowers to lenders? Explain.

5. Jessica bought some shares of stock for a total of 831,500 in 2013 and sold them to Ralph for 830,000 in 2015 who in turn sold them for 831,500 in 201F. The CPI was 210 in 2013, 200 in 2015, 210 in 2017. The tax on capital gains 15% (It is 0% on capital losses). For simplicity, assume that the tax is paid when the capital gain is realized, i.e., when the stock is sold.

(a) How much money did Jessica make in constant 2015 dollars?
(b) How much money did Ralph make in constant 2015 dollars?

6. Assume the labor force is 100 million people and there are 5 million discouraged workers who do not have a job but are not looking for one either. On average, it takes 2 months for an unemployed person to find a job. A job lasts for 2.5 YEARS on average. Assume that the unemployment rate is 10 percent at the beginning of March.

(a) How much will the unemployment rate be at the beginning of April?

(b) Assume that at the beginning of April, the 5 million discouraged workers start looking for a job. How much will the unemployment rate be at the beginning of May?

(c) If we wait long enough, the unemployment rate will converge to some value. Calculate this value.

7. An economy with 6,336 machines and 110 workers has a production function Y = 3K^αL^1-α, where 0 < α < 1. Without any government intervention, CAPI- TAL income is 1/3 of total income. The government, however, intervenes and sets a minimum real wage of 8. Find the unemployment rate.

8. A closed economy (NX = 0) without government (G = T = 0) has a production function Y = K^1/4L^3/4. Capital depreciates at a rate of 3 percent per year. Workers spend 76 percent of their income each year. Investment adds up to the capital stock which is available for production next year. Assume that capital per worker is 5.0625 at the beginning of 2017 and the number of workers stays the same each year.

(a) Find output per worker, consumption per worker, investment per worker, and depreciation per worker in 2017. How much will capital per worker be at the beginning of 2018?

(b) Find the steady-state capital per worker, output per worker, consumption per worker, investment per worker, and depreciation per worker.

(c) Assume that the economy is at its steady state.

(i) Find the marginal product of capital.

(ii) If the government wishes to maximize consumption per worker in the (very) long run, should they increase or decrease the saving rate? Explain.

(iii) Would the current generation approve of the change in the saving rate discussed in (ii)? Explain.

9. Answer as briefly as possible:

(a) Do you expect money velocity to increase, decrease, or stay the same if the nominal interest rate decreases. Explain.

(b) Currently, a lot of money is used to avoid prosecution for illegal activities. In this sense, if drugs are legalized, do you expect the price level to increase, decrease, or stay the same? Explain.

(c) Why is the federal funds rate greater than the overnight reverse repo rate and smaller than the interest rate on excess reserves?

(d) How can unemployment insurance improve workers‘ productivity?

(e) Can the steady decline in union membership explain the dynamics of the natural rate of unemployment in the U.S.? Why or why not?