IOBM

Principles of Macroeconomics

ASSIGNMENT 3

Q1. Who determines the nation's money supply? Explain how the money supply could be expanded or
reduced in an economy in which all money is in the form of currency.

Q2. What is the relationship between the price level and the nominal money supply? What is the
relationship between inflation and the growth rate of the nominal money supply?

Q3. All else being equal, how would each of the following affect the demand for Ml? The demand for
M2? Explain.
a. The maximum number of checks per month that can be written on money market mutual funds and
money market deposit accounts is raised from three to thirty.
b. Home equity lines of credit that allow homeowners to write checks against the value of their homes
are introduced.
c. The stock market crashes, and further sharp declines in the market are widely feared.

Q4. What terms are used to describe the way a variable moves when economic activity is rising or
falling? What terms are used to describe the timing of cyclical changes in economic variables?

Q5. During the period 1973-1975, the United States experienced a deep recession with a simultaneous
sharp rise in the price level. Would you conclude that the recession was the result of a supply shock or a
demand shock? Illustrate, using AD-AS analysis.

Q6. What determines the position of the FE line? Give two examples of changes in the economy that
would shift the FE line to the right.

Q7. Use the IS-LM model to analyze the general equilibrium effects of a permanent increase in the price
of oil (a permanent adverse supply shock) on current output, employment and the real wage.