ECONOMICS 110B/112

Assignment #2

2020/2021

Due Dates and Notes:

• DUE: By Friday March 26, 2:00 PM (Kingston time).

• There is a built-in 72hr grace period for submissions for those who would otherwise request short term Academic Consideration or Accommodation related to the deadline above, so there is no need to make them. We will not accept those requests related to the grace period - you are expected to submit by the deadline. Do not use the grace period unless you must. No exceptions will be made beyond the grace period unless accompanied by a long-term Request for Academic Consideration or Accommodation (both require documentation).

• Upload a single machine-readable file (Word or PDF) to the Assignment Dropbox. Written parts of your answers must be machine-readable (diagrams and algebra can be scanned and embedded within your document with the relevant question). Use the Cover Page when submitting assignments (download from the Assignments page).

• This assignment covers material from Chapters 26-28 on your reading list.

True, False, or Uncertain                [20 marks - 5 marks each]

Explain why each of the following statements is True, False, or Uncertain according to economic principles. Use diagrams where appropriate and show your calculations. Unsupported answers will receive no marks. It is the explanation that is important.

A2-1. Suppose the consolidated balance sheet of an economy where the public holds all its money in the form of bank deposits is shown in the following table. If the banking system is originally in equilibrium and then the economy’s central bank sells 50 worth of government bonds to the banking system, immediately after the transaction there is no change in the money supply, but after the banking system has returned to equilibrium, the money supply is reduced by 1000. [Hint: Use two additional balance sheets in your answer.]

A2-2. The credit card in your wallet is part of your money holdings.

A2-3. The yield of a bond that promises to pay 110 in one year’s time is equal to 5% if the equilibrium price of that bond is 104.76.

A2-4. Suppose price index that is used to guide central bank policy increases from 120 to 126. If the central bank has an inflation target of 2%, it should pursue an expansionary monetary policy. [Hint: Use an AD-AS diagram in your answer.]

Problem                      [20 marks - marks for each part as shown]

A2-5. Suppose a central bank decides to decrease its policy interest rate in an effort to decrease interest rates throughout the economy.

(a) Using a diagram for the money market, explain the effects of the decision on interest rates and how the central bank must respond to support this policy decision. [Hint: make sure to discuss the adjustment to the new equilibrium in the money market.] [5]

(b) Suppose the economy is a closed one. What effect will the policy change have on investment, on aggregate expenditure? Include diagrams in your answer. [5]

(c) What additional effect will there be on aggregate expenditure if the economy was an open one? [5]

(d) How will aggregate demand be affected, whether we treat the economy as closed or open? (Illustrate in a diagram.) Under what circumstances would this policy be appropriate for a central bank that was trying to stabilize the economy? (Illustrate in your diagram.) [5]

The material in this assignment is copyrighted and is for the sole use of students registered in Economics 110, 111 and 112. The material in this assignment may be downloaded for a registered student's personal use but shall not be distributed or disseminated to anyone other than students registered in Economics 110, 111 and 112. Failure to abide by these conditions is a breach of copyright, and may also constitute a breach of academic integrity under the University Senate's Academic Integrity Policy Statement.