Problem Set 2

Soojin Kim

Spring 2015

Due beginning of class on March 10 (Tuesday)

1. Consider the following bank balance sheet.

Assets | Liabilities | |||

Reserves | $10,000 | Deposits | $100,000 | |

Loans | $100,000 | Debt | $20,000 | |

Securities | $40,000 | Equity | $30,000 | |

- What is the leverage ratio at this bank?

- What is the reserve ratio at the bank?

- If all banks had the same reserve ratio, and the original deposit amount from the economy is $100,000. How much money can be generated from the original deposit of $100,000?

- Assume that the monetary base (B) is $100 billion, the reserve-deposit ratio (rr) is 0.1, and the curreny-deposit ratio (cr) is 0.1.

- What is the money multiplier (m)?

- What is the money supply (M)?

- If rr increases to 0.2, but everything else stays the same, what is the money supply? Explain why it is higher or lower than before.

- If cr increases to 0.2, but everything else stays the same (rr = 0:1, B = $100 billion), what is the money supply? Explain why it is higher or lower than before.

- Suppose the money demand function (demand for real money balances) takes the form

M ^{d} _{=} Y _{:}

P5i

- What is the velocity of money in this economy?

- Suppose nominal interest rate is constant. If output grows at rate g, at what rate will the demand for real money balances grow?

- Assume that the in ation rates in 2010, 2011, and 2012 were 1%, 2%, and 3% respectively. During the same periods, nominal interest rates were 5%, 5%, and 6%, respectively.

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- What are the ex-post real interest rates in 2010, 2011, and 2012?

- Suppose expected in ation rate in 2011 is the ex-post in ation rate in 2010, and expected in ation rate in 2012 is the ex-post in ation rate in period 2011. What are the ex-ante real interest rates in 2011 and 2012?

- If someone lends in 2011, based on the ex-ante in ation expectation in part (b), is he better or worse o when the loan is repaid? Explain why.

- Consider an economy where there are 100 unemployed persons and 900 employed persons. The job nding rate (f) of the economy is 0.3 and job separation rate of the economy (s) is 0.02.

- What is the average spell of employment?

- What is the average spell of unemployment?

- How many unemployed persons nd jobs?

- How many employed persons lose their jobs?

- What is the steady-state unemployment rate?

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