04 Jun EXPLAIN WHAT IS MEANT BY THE LIQUIDITY TRAP.
Chapter 9:
1. Define: Bank Assets, liabilities, Capital, Capital Ratio and Leverage Ratio. If a bank’s Assets are 200 and Liabilities are 60 what is the capital of this Bank? What is the Capital Ratio? What is the leverage ratio?
2. Define insolvency and illiquidity. Explain how these terms relate to the crisis in the 2000s.
3. What was done to the Federal Deposit Insurance to assist with the recovery? (be specific)
4. Explain what is meant by the liquidity trap. Also discuss the implications of a liquidity trap for the shapes of the money demand and LM curves.
5. Suppose a liquidity trap exists. Graphically illustrate and explain the effects of an increase in government spending using the IS-LM model.
6. Suppose a liquidity trap exists. Graphically illustrate and explain the effects of an increase in money supply using the IS-LM model.
7. Suppose a liquidity trap exists and output is below its natural level. Graphically illustrate and explain if the economy can return to its natural level using the AS-AD model.
Chapter 10:
1. When assuming that there are two inputs, capital and labor, what is the new aggregate production function?
2. Show an example of constant returns to scale in the aggregate production function.
3. Suppose the capital stock increases by 10% and the number of employed workers increases by 5%. Given this information, explain what will happen to output and to output per worker.
4. Define: decreasing returns to capital and decreasing returns to labor. Give an example or each.
5. What is the relationship between output per worker and capital per worker? Show this relationship graphically. Explain why the curve may be steeper or flatter at certain points. What happens to this curve as technology improves? What is the effect of this on output per worker if capital per worker is held constant?
6. What does sustained growth require?
7. Question 3, page 222 in the book.
8. Consider the production function, Y= .png”>.png”>, write the production function as a relation between output per worker and capital per worker.
9. Consider the production function, Y= .png”>.png”>
a. Compute output when K=81 and N=100.
b. Is this production function characterized by constant returns to scale? Explain.
Chapter 14:
1. Explain what the Fisher effect/Fisher hypothesis represents.
2. Explain in great detail what effect expansionary monetary policy will have on the output, nominal interest rate and real interest rate in the short run and in the medium run if at the initial point of equilibrium output is at its natural level of output. Explain and show graphically using the IS and LM curves as well as a curve showing the interest rates across time.
3. What is meant by the “natural real interest rate.” ?
4. What are the determinants of the nominal interest rate in the medium run? Based on your answer, to what extent can monetary policy affect the nominal interest rate in the medium run? Briefly explain.
5. To reduce the nominal interest rate in the short run, what type of policy should the central bank pursue? Explain.
6. Using the IS-LM model, graphically illustrate and explain what effect a reduction in money growth will have on output, the nominal interest rate, and the real interest rate in the short run.
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