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    ECO 102 - Assignment III

    Uploaded by

    Sayeeda Jahan

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    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd

    ECO 102 - Assignment III

    Uploaded by

    Sayeeda Jahan
    23 views2 pages

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    23 views2 pages

    ECO 102 - Assignment III

    Uploaded by

    Sayeeda Jahan

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
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    of 2

    East West University

    ECO 102 (4) | Spring’ 2022.


    Assignment – III
    Due on 27 April 2022

    The Monetary System

    1. Happy Bank starts with $200 in bank capital. It then accepts $800 in deposits. It keeps
    12.5 percent (1/8th) of deposits in reserve. It uses the rest of its assets to make bank
    loans.
    a. Show the balance sheet of Happy Bank.
    b. What is Happy Bank’s leverage ratio?
    c. Suppose that 10 percent of the borrowers from Happy Bank default and these
    bank loans become worthless. Show the bank’s new balance sheet.
    d. By what percentage do the bank’s total assets decline? By what percentage does
    the bank’s capital decline? Which change is larger? Why?
    (8 marks)

    2. Suppose you take $100 you had kept under your mattress and deposit it in the Happy
    bank account. If this $100 stays in the banking system as reserves and if banks hold
    reserves equal to 10 percent of deposits, by how much does the total amount of deposits
    in the banking system increase? By how much does the money supply increase?

    (4 marks)
    Monetary Policy (15 marks)

    3. Explain how each of the following would affect the quantity of money demanded. Does
    the change cause a movement along the money demand curve or a shift of the money
    demand curve?
    a. Short-term interest rates rise from 5% to 10%.
    b. In order to avoid paying a sharp increase in taxes, residents of Manalia (an
    imaginary country) shift their assets into overseas bank accounts. These
    accounts are harder for tax authorities to trace but also harder for their owners
    to tap and convert funds into cash.
    4. Imagine, in this EID shopping season, the retailers have temporarily slashed prices to
    unexpectedly low levels. Will this increase the opportunity cost of holding cash? Reduce
    it? Have no effect? Explain with graph.

    5. Assume the central bank increases the quantity of money by 25%, even though the
    economy is initially in both short-run and long run macroeconomic equilibrium.
    Describe the effects in the short run and in the long run on the following:
    i. Aggregate output
    ii. Aggregate price level
    iii. Interest rate

    Page 1 of 2
    Open Economy Macroeconomics: Basic Concepts

    6. What is happening to the U.S. real exchange rate in each of the following situations?
    Explain.
    a. The U.S. nominal exchange rate is unchanged, but prices rise faster in the United
    States than abroad.
    b. The U.S. nominal exchange rate is unchanged, but prices rise faster abroad than
    in the United States.
    c. The U.S. nominal exchange rate declines, and prices are unchanged in the United
    States and abroad.
    d. The U.S. nominal exchange rate declines, and prices rise faster abroad than in the
    United States.
    (12 marks)

    7. A can of soda costs $1.25 in the United States and 25 pesos in Mexico. What is the peso–
    dollar exchange rate (measured in pesos per dollar) if purchasing power parity holds?
    If a monetary expansion caused all prices in Mexico to double, so that soda rose to 50
    pesos, what would happen to the peso–dollar exchange rate?
    (3 marks)

    8. A case study in the chapter analyzed purchasing power parity for several countries using
    the price of Big Macs. Here are data for a few more countries:

    a. For each country, compute the predicted exchange rate of the local currency per
    U.S. dollar. (Recall that the U.S. price of a Big Mac was $4.93.)
    b. According to purchasing-power parity, what is the predicted exchange rate
    between the Hungarian forint and the Canadian dollar? What is the actual
    exchange rate?
    c. How well does the theory of purchasing-power parity explain exchange rates?

    (8 marks)

    Best of luck!

    Page 2 of 2

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