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# Problem Set III Econ 101 B Fall 2013 Due Date: Tuesday Oct. 22nd 5 p.m.

## . with Hints and Corrections

1. Download the following time-series from FRED: Reserve Balance Requirements (RESBALREQ). Currency Component of M1 (CURRENCY). Excess Reserves of Depository Institutions (EXCRESNS). Total Checkable Deposits (TCDNS).

and from them calculate and graph the money multiplier for the U.S. from February of 1984 to today. Be sure to label you graph carefully. 2. What happened to the multiplier during the most recent recession and what are the implications of this change for using the multiplier as a tool for monetary policy? 3. Create a graph of the following time series using monthly data from Jan 2007 August 2013. Monetary Base (BOGMBASE) Excess Reserves (EXCRESNS) Feds Purchases of Treasury Securities (WOHOSNB) Feds Purchases of MBS (WSHOMCB) (Note: Define asset purchases= WOHOSNB + WSHOMCB) What changed in Sep 2008? Later, youll need to explain why the Fed is doing what its doing. For now, you should be able to describe what it doing in terms of the 3-parties that determine the money supply. Refer to the graphs you just made to answer the following. (Hint: Just because M1 and the money multiplier are not listed above, feel free to include them if it helps you answer the questions below.) How much did the Fed increase its asset purchases between August 2008 and December 2008? What effect did this have on the monetary base? What has happened to the monetary base since December 2008? Has M1 grown as much as the monetary base? Why or why not? What does this have to do with the money multiplier?

4. Using the Quantity Theory of Money, derive an expression for the rate of inflation for the case when the velocity of money is not a constant and use it to explain the pre-1990 and post1990 curves on slide 41 of lecture 10. 5. Beginning with the second equation for Y in the middle of slide 27 of lecture 12, carry out the algebra needed to obtain the equation for the IS curve. 6. In our derivation of the IS curve we made the simple assumption that taxes are completely autonomous: . A more realistic tax function would be one where taxes increase with income as described by . Follow the steps you undertook in the earlier question with this more realistic tax function to derive a new equation for the IS-curve.
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Problem Set III Econ 101 B Fall 2013 Due Date: Tuesday Oct. 22nd 5 p.m. with Hints and Corrections
7. This problem is about business cycles, peaks and troughs.1 Start with Jan 1948 (or 1948Q1) data and answer the following questions. See the appendix for what graphs should (sort of) look like. a) Using monthly data, what is the average increase in the unemployment rate from dated peaks to dated troughs? b) Use Real GDP (quarterly, chained 2009 dollars) and compute the average percent decline in real gdp, one quarter, two quarters, three quarters, and four quarters after the dated peaks. (see graphs on next page). c) Use Real GDP (quarterly, chained 2009 dollars) and compute the average increase in real gdp for quarters 1,2,3,4,,8. Compare the performance of this recovery to the average. (see graphs on next page) d) Repeat (b) and (c) using nonfarm payroll employment. You may use months rather than quarters, since payroll data is reported monthly. (Note: the graphs produced below used quarterly averages of monthly data. Fred allows you to specify frequency. To convert to quarterly from monthly, select quarterly on the download page. Finally, if you use monthly data youll need to change the reference period to months.) e) How does the Great Recession and US economic performance through 2012Q4 (Dec 2012) compare to the average? A graph is not required, but itll make your answer clearer.

Reference: http://www.nber.org/cycles.html. Data can be found on the St. Louis Feds Fred website. http://research.stlouisfed.org/

Problem Set III Econ 101 B Fall 2013 Due Date: Tuesday Oct. 22nd 5 p.m. with Hints and Corrections
Appendix Business Cycle Reference Graphs Real GDP Relative to Peaks and Troughs

Problem Set III Econ 101 B Fall 2013 Due Date: Tuesday Oct. 22nd 5 p.m. with Hints and Corrections
Employment Relative to Peaks and Troughs