Monetary Policy and Required Reserve Ratio

Topics: Monetary policy, Federal Reserve System, Money supply Pages: 7 (1505 words) Published: December 9, 2013


MIDDLESEX UNIVERSITY

ECS 1260-65 ECONOMICS FOR (BUSINESS AND) MANAGEMENT

Final COURSEWORK

April 2012

Submission Deadline: 23rd April 2012

Student Name: Ali Abbas Muhammad Saeed ID: M00384206

INSTRUCTIONS

1) This coursework has ten questions. Each question is in the combined form of multiple choice and narrative answer. You must answer all questions. 2) The multiple choice part is assigned 50% weight. The other 50% is assigned to the narrative part of the question. 3) The narrative part is to be used to justify your answer in the multiple choice part. If you answer the multiple choice part wrong, no points will be assigned to the narrative part of the question. 4) This coursework is to be done individually only.

5) The narrative part of the question should be answered within the space provided. Thus, answers should be very short. The whole assignment must have no more than six pages (including the front page and page of instructions). Additional sheets are not accepted. 6) The deadline for submission is 23rd April 2012, at the Students Office, Williams Building (ground floor).

ECS 1260-65 Final Coursework 2011-2012

1) If nominal GNP increases at a rate of 10 per cent per year while the GNP deflator increases at 8 per cent per year, then
A. real GNP remains constant
B. real GNP rises by 10 per cent
C. real GNP falls by 8 per cent
D. real GNP rises by 2 per cent

Explain.
Real GNP refers to the market value of goods and services produced within a year, at constant prices.

2) Suppose that national income is initially at its equilibrium level when desired investment falls. We would expect

A. a fall in national income, but not by as much as the fall in desired investment B. no change in national income even though desired investment spending falls C. an increase in national income by an amount equal to the reduction in investment spending

D. a fall in national income by some multiple of the fall in desired investment spending

Explain.
Investment curve is a straight line curve parallel to x axis. At equilibrium level savings = investment. When investment falls, national income does not change, but savings > investment, which leads to excess demand. So prices increase, economy is in full employment and supply is constant.

3) If the MPC for the economy is 0.8, then

A. MPS is 1/0.8
B. the multiplier is 4
C. the multiplier is undefined
D. the MPS is 0.2
Why?
It is because of multiplier effect.
E.g.: Assume an initial £100 million of autonomous investment. This money will return to the households in terms of income earned from the factors of production (land, labor and capital) hired by the firms. It is assumed that the MPC = 0.8, and so the MPS = 0.2. Hence, households save 20% of this income. £20 million is saved and the rest is spent on the goods and services produced by the firms. This £80 million again returns to the households in terms of factor incomes. 20% of this is saved (£16 million) leaving £64 million to be spent on goods and services. This process keeps going. The initial £100 million will multiply to give a final increase in total national income of much more than £100 million. In fact, there is a formula that can be used to find the multiplier: Multiplier (m) = 1/1-MPC = 1/MPS to simplify, MPC+MPS=1. 4) The prevention of major swings in economic activity can be handled most easily by the

A. household sector
B. business sector
C. financial sector
D. government sector

Explain how.
Keynes argued that the business cycle was due to extreme swings in the total demand for goods and services. The total demand in an economy from households, business, and government is...
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