Exam 3

Due Date 11/21/2017 - Beginning of class

Assume the following economics model:

Show all calculations in all questions where calculations are necessary.

C = 100 + 0.80Yd

I = 300 + 2r

G = 600

X = 600

M = 700 + 0.03Yd

M^d/P=.2Y - 20r

P=1

M^s = 160

T = 150 + 0.15Y

5 points each

1a. What is the equilibrium level of income in the model?

b. What is the equilibrium level of I?

c. What is the equilibrium level of r?

d. What is the equilibrium level of the trade balance?

e. What is the equilibrium level of C?

f. At equilibrium, is the government running a budget deficit, surplus, or a balanced budget? How much?

20 points each for a total of 60 points

2. List and explain each of the three primary monetary tools available to the Federal Reserve. In your explanation, provide detail on how the Fed would change each of the tools to increase the money supply and how this would work its way through the economy to expand the money supply.

10 points

3. Assume full-employment equilibrium in this economy is $3,000. Define the economic problem in this economy and then develop monetary policy to resolve the problem. Specifically, identify what should be done for each of the three monetary policy tools and explain how these will work through the economy to help resolve the economic issue.