Question 1: a) Inflation interferes with the functions of money. Which of the three functions is impaired, even when the inflation rate is quite low? Considering higher rates of inflation, which function is affected next? Which function of money is the last to suffer substantial damage from inflation?
b) What are some reasons that an "emerging market" country may choose a fixed exchange rate regime?
Question 2: 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, the real interest rate, consumption, investment, and the price level. Draw a graph for each.
a. Tougher immigration laws reduce the working-age population.
b. There's increased volatility in the prices of stocks and bonds.
c. The government tries to achieve tax equity by an increase in the corporate tax rate.
d. Increased computerization reduces stock market brokerage costs.
Question 3: Suppose real output is 12,500, and the demand for real money balances is Md/P = Y/4 - 125i. If the equilibrium interest rate is 7 percent, calculate the money supply. If the central bank sets the interest rate at 8 percent, what is the new money supply?
Question 4: Desired consumption is Cd = 2000 + 0.9Y - 100,000r - G, and desired investment is Id = 1000 - 45,000r. Real money demand is Md/P = Y - 6000i. Other variables are πe = 0.03, G = 500, Y = 1000, and M = 2100.
a. Find the equilibrium values of the real interest rate, consumption, investment, and the price level. b. Suppose government purchases decline to 400. What happens to the variables listed in part (a)? c. Suppose government purchases rise to 600. What happens to the variables listed in part (a)? d. What feature in this example leads to the result that you don't need to know the amount of taxes collected by the government to find the equilibrium?
Question 5: Go to Bank of Canada website: https://www.bankofcanada.ca/
Look for the currency converter and obtain exchange rate data from Canadian dollar to a currency of your choice (except US dollar). Copy data into an Excel spreadsheet and plot it against time. Comment on the graph. Discuss trends, appreciation, depreciation.
Question 6: Use The Economist's Big Mac index (https://www.economist.com/content/big-mac-index) to investigate the characteristics of China's currency.
a) What is the most recent price of a Big Mac in China?
b) Does this measure suggest that the Chinese Yuan is overvalued or undervalues relative to the dollar? Why this might be beneficial to the Chinese economy?
c) This index assumes that the cost of producing a Big Mac is identical across countries. Why this assumption might be violated? How this affects your answer in part b)?
d) Which three countries are most undervalued relative to the U.S. dollar in the most recent year? Which are most overvalued?