Docsity
Log inSign up
Docsity
Prepare for your exams
Prepare for your exams

Study with the several resources on Docsity

Earn points to download
Earn points to download

Earn points by helping other students or get them with a premium plan

Guidelines and tips
Guidelines and tips
Sell on Docsity
Sell on Docsity
Log inSign up

Prepare for your exams

Study with the several resources on Docsity

Find documents

Prepare for your exams with the study notes shared by other students like you on Docsity

Search Store documents

The best documents sold by students who completed their studies

Search through all study resources
Docsity AINEW

Summarize your documents, ask them questions, convert them into quizzes and concept maps

Explore questions

Clear up your doubts by reading the answers to questions asked by your fellow students

Earn points to download

Earn points by helping other students or get them with a premium plan

Share documents
download point icon20 Points

For each uploaded document

Answer questions
download point icon5 Points

For each given answer (max 1 per day)

All the ways to get free points
Get points immediately

Choose a premium plan with all the points you need

Study Opportunities

Choose your next study program

Get in touch with the best universities in the world. Search through thousands of universities and official partners

Community

Ask the community

Ask the community for help and clear up your study doubts

University Rankings

Discover the best universities in your country according to Docsity users

Free resources

Our save-the-student-ebooks!

Download our free guides on studying techniques, anxiety management strategies, and thesis advice from Docsity tutors

From our blog

Exams and Study
Go to the blog

Assignment 8 with Solutions - Intermediate Macroeconomics Analysis | ECON 402, Assignments of Macroeconomics

Central Washington University (CWU)Macroeconomics
Prof. Charles Wassell

Material Type: Assignment; Professor: Wassell; Class: Intermediate Macroeconomics Analysis; Subject: Economics; University: Central Washington University; Term: Unknown 1989;

Typology: Assignments

Pre 2010

Uploaded on 08/19/2009

koofers-user-o5k
koofers-user-o5k 🇺🇸

5

(1)

10 documents

1 / 2

Toggle sidebar

This page cannot be seen from the preview

Don't miss anything!

bg1
CandidateAnswersHomework#8
ECON402–Spring2009
1. (Q3p.279)Theprisoner‐of‐warcampdescribedbyRadfordperiodicallyreceivedlargeshipmentsof
cigarettesfromtheRedCrossorothersources.
a. Howdidcigaretteshipmentsaffectthepricelevel(thepricesofgoodsintermsofcigarettes)inthe
POWcamp?
Newcigarettesequatetoahighernominalmoneysupply.Withnocorrespondingchangeinreal
moneydemand,theequilibriumpricelevelmustrise.Conceptually,youhavemorecigarettes
beingusedinthesamenumberoftransactionsasbeforetheshipmentarrival.
b. Onsomeoccasionstheprisonersknewinadvancewhenthecigaretteshipmentsweretoarrive.
Whathappenedtothedemandforcigarettemoneyandthepricelevelinthecampinthedaysjust
beforeananticipatedshipment?
Ifthereisananticipatedshipment,thenpricesareexpectedtoincrease(i.e.,expectedinflationis
positive,albeitbriefly,atsomepointinthefuture).AtthetimeoftheshipmentPOW’swantto
possessfewercigarettesfortransactionspurposes–theirrealmoneydemandisreduced.Butthe
realdemandformoneygoesdowntodayinanticipationoflowerdesiredcigaretteholdingslater.
Withafixedsupplyofcigarettes,priceswillincreasetoday.Conceptually,prisonersaccelerate
theirpurchasessoastoendupwithfewerdevaluedcigarettes;thisspikeindemanddrivesprices
up.
2. (Q4p.279)Assumethatpricesandwagesadjustrapidlysothatthemarketsforlabor,goods,andassets
arealwaysinequilibrium.Whataretheeffectsofeachofthefollowingonoutput,therealinterestrate,
andthecurrentpricelevel?
a. Atemporaryincreaseingovernmentpurchases.
Ifthereisatemporaryincreaseingovernmentpurchases,nationalsavingdeclines.Thiscausesthe
realinterestratetoriseforagivenlevelofoutput.Iftherealinterestrateincreases,realmoney
demanddeclines.Consequentlypricesmustrisetoequilibratemoneysupply(unchanged)with
moneydemand(lower).Thenetresultisthatoutputisunchangedandtherealinterestrate
increases,asdoesthepricelevel.
b. Areductioninexpectedinflation.
Whenexpectedinflationfalls,realmoneydemandincreases.Inflationhaslittleornoeffecton
eitheremploymentorsaving/investment(seehandout),consequentlyoutputandtherealinterest
rateareunchanged.Higherrealmoneydemandandunchangedmoneysupplyrequirespricesto
declinetoequatemoneysupplyanddemand.
pf2

Partial preview of the text

Download Assignment 8 with Solutions - Intermediate Macroeconomics Analysis | ECON 402 and more Assignments Macroeconomics in PDF only on Docsity!

Candidate Answers Homework # ECON 402 – Spring 2009

  1. (Q3 p. 279) The prisoner‐of‐war camp described by Radford periodically received large shipments of cigarettes from the Red Cross or other sources. a. How did cigarette shipments affect the price level (the prices of goods in terms of cigarettes) in the POW camp? New cigarettes equate to a higher nominal money supply. With no corresponding change in real money demand, the equilibrium price level must rise. Conceptually, you have more cigarettes being used in the same number of transactions as before the shipment arrival. b. On some occasions the prisoners knew in advance when the cigarette shipments were to arrive. What happened to the demand for cigarette money and the price level in the camp in the days just before an anticipated shipment? If there is an anticipated shipment, then prices are expected to increase (i.e., expected inflation is positive, albeit briefly, at some point in the future). At the time of the shipment POW’s want to possess fewer cigarettes for transactions purposes – their real money demand is reduced. But the real demand for money goes down today in anticipation of lower desired cigarette holdings later. With a fixed supply of cigarettes, prices will increase today. Conceptually, prisoners accelerate their purchases so as to end up with fewer devalued cigarettes; this spike in demand drives prices up.
  2. (Q4 p. 279) Assume that prices and wages adjust rapidly so that the markets for labor, goods, and assets are always in equilibrium. What are the effects of each of the following on output, the real interest rate, and the current price level? a. A temporary increase in government purchases. If there is a temporary increase in government purchases, national saving declines. This causes the real interest rate to rise for a given level of output. If the real interest rate increases, real money demand declines. Consequently prices must rise to equilibrate money supply (unchanged) with money demand (lower). The net result is that output is unchanged and the real interest rate increases, as does the price level. b. A reduction in expected inflation. When expected inflation falls, real money demand increases. Inflation has little or no effect on either employment or saving/investment (see handout), consequently output and the real interest rate are unchanged. Higher real money demand and unchanged money supply requires prices to decline to equate money supply and demand.

c. A temporary increase in the labor supply. If labor supply rises, full‐employment output also rises. With higher output comes higher saving, leading to a reduction in the real interest rate. Higher output and a lower real interest rate both work to increase real money demand. With a fixed money supply, higher real money demand must be met by a decline in the price level. d. An increase in the interest rate paid on money. The “interest rate paid on money increases” is another way of saying that the expected inflation rate decreases. The macroeconomic response is the same as in part b, above.