(a) Use the table below to work Problems 1 to 4. The table shows an economy’s demand for loanable funds and the supply of loanable funds schedules, when the government’s budget is balanced. (4 marks) 1. Suppose that the government has a budget deficit of $2 billion. What are the real interest rate, the quantity of investment and the quantity of private saving? Does any crowding out occur? (1mark) 2. Suppose that the government has a budget deficit of $2 billion and the Ricardo–Barro effect occurs, what are the real interest rate and the quantity of investment? (1mark) 3. Suppose that the quantity of loanable funds demanded increases by $3 billion at each real interest rate and the quantity of loanable funds supplied increases by $1 billion at each interest rate. If the government budget is balanced, using the table above, calculate the real interest rate, the quantity of loanable funds, investment and private saving. Does any crowding out occur? (1mark) 4. If the government wants to stimulate investment and increase it to $11 billion, what must it do? (Use your answer to section 3 to explain). (1mark) (b) Lisa is a student who teaches golf on the weekend and in a year earns $20,000 after paying her taxes. At the beginning of 2014, Lisa owned $1,000 worth of books, CDs and golf clubs and she had $5,000 in a savings account at the bank. During 2012, the interest on her savings account was $600 and she spent a total of $15,600 on consumption goods and services. There was no change in the market values of her books, CDs and golf clubs. (2marks) 1. How much did Lisa save in 2012? (1mark) 2. What was her wealth at the end of 2012? (1mark) Real interest rate Loanable funds demanded Loanable funds supplied (per cent per year) (billions of 2009/10 dollars) 1 11 5 2 10 6 3 9 7 4 8 8 5 7 9 6 6 10 7 5 11 Question 2 (a) In June 2011, M1 was $300 billion; M3 was $1,300 billion; current deposits at banks were $250 billion and broad money totalled to $1,400 billion. Calculate currency held by individuals and businesses; other deposits at banks, building societies and credit unions; and deposits at other financial institutions (NBFIs). (1.5marks) (b) Use the following information to work Problems 1 and 2. In the economy of Nocoin, banks have deposits of $500 billion. Their reserves are $15 billion, two thirds of which is in deposits with the central bank. Households and firms hold $30 billion in bank notes. There are no coins! (5.5marks) 1. Calculate the monetary base and the quantity of money. (1mark) 2. Calculate the banks’ desired reserve ratio and the currency drain ratio (as percentages). (1mark) 3. Suppose that the Bank of Nocoin, the central bank, increases bank reserves by $0.5 billion. What happens to the quantity of money? Explain whether the change in the quantity of money is equal the change in the monetary base. Calculate the money multiplier. (3.5 marks) (c) Quantecon is a country in which the quantity theory of money operates. In year 1, the economy is at full employment and real GDP is $400 million, the price level is 200, and the velocity of circulation is 40. In year 2, the quantity of money increases by 20 per cent. Calculate the quantity of money, the price level, real GDP and the velocity of circulation in year 2. (2 marks) Question 3: Refer to Chapter 23 (7 marks) (a) The Australian dollar exchange rate increased from $US0.85 in June 2010 to $US1.07 in June 2011 and it increased from 70 euro cents in June 2010 to 74 euro cents in June 2011. (3marks) 1. Did the Australian dollar appreciate or depreciate against the U.S. dollar? Did the Australian dollar appreciate or depreciate against the euro? (1 mark) 2. What was the value of the U.S. dollar in terms of Australian dollars in June 2010 and June 2011? Did the U.S. dollar appreciate or depreciate against the Australian dollar over the year June 2010 to June 2011? (1 mark) 3. What was the value of one euro (100 euro cents) in terms of Australian dollars in June 2010 and June 2011? Did the euro appreciate or depreciate against the Australian dollar over the year June 2010 to June 2011? (1 mark) (b) On 16 February 2015, the U.S. dollar was trading at 118 yen per U.S. dollar on the foreign exchange market. On 12 March 2015, the U.S. dollar was trading at 121 yen per U.S. dollar. (4 marks) 1. What events in the foreign exchange market might have brought this fall in the value of the U.S. dollar? 2. Did the events change the demand for U.S. dollars, the supply of U.S. dollars, or both demand and supply on the foreign exchange market?