Macroeconomics basic questions

  • Consider the money market. In conducting monetary policy the Bank of Canada arranges the purchase and sale of Government of Canada securities with the chartered banks.
    • Show changes (with a + or – sign) to the assets and liabilities of the Bank of Canada and the Chartered Banks if the Bank of Canada sells $50 million in securities to the chartered banks.
    • Briefly explain in words (1-2 sentences and with no diagram) whether this is an example of expansionary or contractionary monetary policy AND how this sale of securities in a) will change the money supply and the equilibrium interest rate.
    • Briefly explain in words (1-2 sentences with no diagram) what type of short-run “gap” the sale of securities would be used to eliminate AND what the impact of this monetary policy would be on the equilibrium real GDP and the price level.
    • Assuming this is an open economy with international capital mobility, briefly explain (1-2 sentences with no diagram) the second part to the monetary transmission mechanism as a result of the monetary policy described in b) above.
    • Briefly explain (in 2 sentences with no diagram) the Keynesian and Monetarists debate about the effectiveness of monetary policy as a tool to stimulate growth and the assumptions about the demand for money curve and the investment demand curve held by each.
  • Suppose an economy is Initially in equilibrium at potential GDP, Y*. Then the government decreases the net tax rate (t).
  • Consider the market for financial capital and the relationship among saving, investment, and the interest rate. Assume that the economy is in a long-run equilibrium with Y=Y*.
    • Suppose there is an increase in consumption in this economy. Briefly explain (in 1 sentence without the use a diagram) any shifts in desired investment or national savings and the resulting impact on national savings, investment and the real interest rate.
    • Suppose the government decides to encourage national saving. Briefly identify (1 sentence) two ways the government could this.
    • Briefly explain (1-2 sentences) the effects of these actions of government (from part b above) on the economic growth rate.
    • Briefly explain (1-2 sentences) what the neoclassicals assume about technology in their model of economic growth and what. It meant for economic growth over time.
    • Briefly explain (1-2 sentences) what is meant by the “paradox of thrift”.
Bank of Canada
Assets Liabilities and Net Worth
Chartered Banks
Assets Liabilities and Net Worth
  • Briefly explain in words (1-2 sentences without a diagram) What type of gap would be caused by this policy AND the impact on real GDP and the price level in the short-run.
  • Briefly explain in words (1-2 sentences with no diagram) how the economy adjusts back to the long run equilibrium if left alone and no further fiscal or monetary policy is used.
  • In going from the short run equilibrium to the long-run equilibrium, briefly explain (1 sentence) how the composition of real GDP may have changed.
  • Briefly explain what the difference in the growth rate of potential GDP might occur If instead of a decrease in the net tax rate, there was an increase in government purchases (1 sentence).
  • Briefly explain (1-2 sentences without a diagram) what the “Money Neutrality” argument implies about the effectiveness of discretionary fiscal policy and the impact on potential real GDP and price level in the long run.

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