International Business Management EXAM

Q#1 What happens to M1 and M2 due to each of the following changes? (a) You take $500 out of your checking account and put it into a passbook savings account. (b) You take $1000 out of your checking account and buy traveler’s checks. (c) You take $1500 out of your money-market mutual fund and deposit into your checking account. (d) You cash in $2000 in savings bonds and invest the money in a certificate of deposit. Q#2 How would each of the following affect national saving, investment, the current account balance, and the real interest rate in a large open economy? a. An increase in the domestic willingness to save (which raises desired national saving at any given real interest rate). b. An increase in the willingness of foreigners to save. c. A temporary increase in government purchases. d. An increase in taxes (consider both the case in which Ricardian equivalence holds and the case in which it doesn't hold). Q#3 Explain Demand for money and Determinants of the Demand for money? Q#4 In a small open economy, desired national saving S = $10 billion + ($100 billion)rw desired investment, I = $15 billion - ($100 billion)rw output Y = $50 billion, government purchases, G = $10 billion, world real interest rate, rw= 0.03. Find the economy's national saving, investment, current account surplus, net exports, desired consumption, and absorption Q#5 Money demand in an economy in which no interest is paid on money is Md/p = 500 + 0.2Y - 1000i. a. Suppose that P = 100, Y = 1000, and i = 0.10. Find real money demand, nominal money demand, and velocity. b. The price level doubles from P = 100 to P = 200. Find real money demand, nominal money demand, and velocity Q#6 Suppose the money demand function is given by Md/P = 640 + 0.1Y – 5000 (r + π). Suppose the central bank changes the nominal money supply depending on income and inflation: Ms = 1000 + 0.1Y – 4000i. (a) If expected inflation equals actual inflation = 0.03, Y = 1000, and r = 0.02, calculate the price level. (b) If inflation rises to 0.04 while the other variables remain as in part a, calculate the price level. (c) If expected inflation rises to 0.04 while the other variables remain as in part a, calculate the price level. (d) If the real interest rate rises to 0.03 while the other variables remain as in part a, calculate the price level. Q#7. Explain Business cycle and cyclical behavior of macroeconomic variables (direction and timing)? Q#8 When a recession occurs, do economists expect it to be a temporary phenomenon? Or is there some degree of permanence? What is the empirical evidence? Q#9 a) Differentiate Demand pull and cost push inflation with the help of graph which one you suggest for economy and why? b) Define Hyperinflation, Stagflation? Q#10 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. a) Explain quantity theory of money? Q#11 Define general equilibrium and show the general equilibrium point in the IS-LM diagram. If the economy isn't in general equilibrium, what determines output and the real interest rate? What economic forces act to bring the economy back to general equilibrium? Q# 12 Suppose the central bank’s short-run response to any change in the economy is to change the money supply to maintain the existing real interest rate. What would happen to money supply if there were a reduction in government purchases? Given the Fed’s policy, what would happen in the very short run (before general equilibrium is restored) to output and the real interest rate? What must happen to the LM curve and the price level to restore general equilibrium? Q#13 Drive aggregate demand (AD) curve? Why does the AD curve slope downward? Give two examples of changes in the economy that shift the AD curve up and to the right and explain why the shifts occur? Q#14 Suppose you were a forecaster of the real wage rate, employment, output, the real interest rate, consumption, investment, and the price level. A shock hits the economy, which you think is a temporary adverse supply shock. (a) What are your forecasts for each of the variables listed above (rise, fall, and no change)? (b) What if the shock was really due to people’s reduced expectations about their future income. Which variables did you forecast correctly, and which did you forecast incorrectly? Q#15 Use the IS-LM model to determine the effects of each of the following on the general equilibrium values of the real wage, employment, output, real interest rate, consumption, investment, and price level. a. A reduction in the effective tax rate on capital increases desired investment. b. The expected rate of inflation rises. c. An influx of working-age immigrants increases labor supply (ignore any other possible effects of Increased population). d. Increased usage of automatic teller machines reduces the demand for money. Q#16 Desired consumption and investment are Cd = r + 0.20Y; Id = r. As usual, Y is output and r is the real interest rate. Government purchases, G, are 2000. a). Find an equation relating desired national saving, s, to r and Y. b). i) What value of the real interest rate clears the goods market when Y = 10,000? Use both forms of the goods market equilibrium condition. ii) What value of the real interest rate clears the goods market when Y = 10,200? Graph the IS curve. c). Government purchases rise to 2400. How does this increase change the equation for national saving in Part (a)? What value of the real interest rate clears the goods market when Y = 10,000? Use both forms of the goods market equilibrium condition. How is the IS curve affected by the increase in G? Q#17 a) 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.