Variant 10

1. Describe the functions of money Money serves several key functions in an economy:

o Medium of exchange: Facilitates transactions by eliminating the need for barter.

o Unit of account: Provides a standard measure of value for goods and services.

o Store of value: Retains value over time, allowing people to save and defer spending.

o Standard of deferred payment: Enables credit transactions by allowing future

payments.

2. Explain the roles of monetary and fiscal policy in causing and ending hyperinflations.

o Causing Hyperinflation:

 Excessive money printing by the central bank leads to a rapid increase in

money supply, reducing its value.

 High government deficits financed by printing money increase demand and

push up prices.

 Loss of confidence in the currency leads to a downward spiral of increasing

inflation.

o Ending Hyperinflation:

 Monetary policy: Reducing the money supply, increasing interest rates, and
stabilizing the currency.

 Fiscal policy: Reducing government spending, increasing taxes, and restoring

confidence in the economy.

3. Do Europeans work more or fewer hours than Americans? List three hypotheses that have
been suggested to explain the difference. Europeans work fewer hours than Americans.
Three possible explanations include:

o Cultural differences: European societies value leisure more than Americans.

o Government policies: Strong labor protections, shorter workweeks, and higher

vacation time in Europe.

o Taxation and incentives: Higher taxes in Europe may discourage additional work
hours.

4. Inflation calculations: Given:

o Price increase in 2001 compared to 2000: 125%

 o Price increase in 2002 compared to 2000: 140%

a) Inflation rate in 2002 compared to 2001: Inflation Rate=P2002−P2001P2001×100%\

text{Inflation Rate} = \frac{P_{2002} - P_{2001}}{P_{2001}} \times 100\% =140−125125×100%= \
frac{140 - 125}{125} \times 100\% =15125×100=12%= \frac{15}{125} \times 100 = 12\%

b) Years needed for prices to double at a stable inflation rate: Using the Rule of 70:
Years to double=70Inflation Rate\text{Years to double} = \frac{70}{\text{Inflation Rate}}
=7012≈5.83 years= \frac{70}{12} \approx 5.83 \text{ years}

5. Changes in money demand due to credit expansion: Given:

o Reserves: 250 bln USD

o Deposits: 980 bln USD

o Reserve ratio: 20%

Calculations:

o Required reserves: D×R=980×0.2=196D \times R = 980 \times 0.2 = 196 bln USD

o Excess reserves: R−Required reserves=250−196=54R - \text{Required reserves} =

250 - 196 = 54 bln USD

o Money multiplier: m=1R=10.2=5m = \frac{1}{R} = \frac{1}{0.2} = 5

o Change in money supply: ΔM=Excess Reserves×m=54×5=270\Delta M = \text{Excess

Reserves} \times m = 54 \times 5 = 270 bln USD

Variant 11

1. Explain how banks create money.

o Banks create money through the fractional reserve banking system by lending out
deposits.

o A portion of deposits is kept as reserves, while the rest is loaned out, creating new
deposits.

o This process multiplies the money supply through the money multiplier effect.

2. List all causes of frictional unemployment.

o Job transitions: Workers moving between jobs.

o Geographic mobility: Difficulty relocating for work.

o Mismatch of skills: Workers seeking jobs that fit their expertise.

 o Information gaps: Lack of knowledge about job opportunities.

3. Give three explanations of why the real wage may remain above the level that
equilibrates labor supply and labor demand.

o Minimum wage laws: Government-imposed wage floors prevent wages from falling.

o Labor unions: Bargaining power keeps wages high.

o Efficiency wages: Employers pay higher wages to increase productivity and reduce
turnover.

4. Finding the potential GDP: Given:

o MPC = 0.75

o Actual production = 2000

o Increase in government spending by 50%

o Reduction in taxes by 20

Multiplier effect: k=11−MPC=11−0.75=4k = \frac{1}{1 - MPC} = \frac{1}{1 - 0.75} = 4

Change in GDP=k×(Change in Government Spending−Change in Taxes)\text{Change in GDP} = k \
times (\text{Change in Government Spending} - \text{Change in Taxes}) =4×(50−20)=120= 4 \times
(50 - 20) = 120 Potential GDP=2000+120=2120\text{Potential GDP} = 2000 + 120 = 2120

5. Total money supply with reserve ratio: Given:

o Deposit = 2000 USD

o Reserve ratio = 20%

o Reserve held = 400 USD

o Credit given = 1600 USD

Money multiplier: m=10.2=5m = \frac{1}{0.2} = 5 Total money supply:

Total money supply=extDeposit×m\text{Total money supply} = ext{Deposit} \times m
=2000×5=10,000 USD= 2000 \times 5 = 10,000 \text{ USD}

Variant 12

1. Why might a banking crisis lead to a fall in the money supply? A banking crisis can lead to
a fall in the money supply because banks may suffer significant losses, leading to a decline
in their ability to lend. When banks face liquidity problems, they may restrict credit
 issuance, reducing the money multiplier effect. Additionally, if depositors lose confidence,
they might withdraw their funds in large amounts, leading to a reduction in deposits, which
are a key component of the money supply.

2. Explain the impact of an increase in the money supply in the short run and in the long
run.

o Short run: An increase in the money supply can lead to lower interest rates,
encouraging borrowing and investment. This stimulates aggregate demand, leading
to higher output and employment levels. Inflation may start to rise if demand
outpaces supply.

o Long run: In the long run, increasing the money supply primarily affects the price
level rather than output. According to the quantity theory of money, excessive
money supply growth leads to inflation, eroding the purchasing power of money.

3. Use the Keynesian cross to explain why fiscal policy has a multiplied effect on national
income. The Keynesian cross illustrates that an initial increase in government spending
leads to a more than proportional increase in national income due to the multiplier effect.
When the government increases spending, businesses experience higher revenues, leading
to increased wages and consumption. This cycle continues as each additional round of
spending generates further increases in income, making the overall effect larger than the
initial spending boost.

4. Find the country’s GDP for the year. GDP = Personal Consumption Expenditures + Gross
Investment + Government Purchases + Net Exports GDP = $50 billion + $25 billion + $20
billion + (-$10 billion) GDP = $85 billion

5. Money supply calculation after credit issuance:

o Required reserves = Deposits ×\times Reserve Ratio = 980×0.2=196980 \times 0.2 =

196 bln USD

o Excess reserves = Total Reserves - Required Reserves = 250−196=54250 - 196 = 54

bln USD

o Money multiplier m=1R=10.2=5m = \frac{1}{R} = \frac{1}{0.2} = 5

o Change in money supply ΔM=54×5=270\Delta M = 54 \times 5 = 270 bln USD

Variant 13

1. The Quantity Theory of Money The Quantity Theory of Money states that the money
supply MM and the price level PP are directly related, assuming velocity VV and real output
YY remain constant. The equation is: MV=PYMV = PY This means that increasing the money
supply without a corresponding increase in output leads to inflation.
 2. Why does the aggregate demand curve slope downward? The aggregate demand curve
slopes downward due to:

o The wealth effect: Lower prices increase real wealth, boosting consumption.

o The interest rate effect: Lower prices lead to lower interest rates, increasing
investment.

o The exchange rate effect: Lower domestic prices make exports more competitive,
increasing net exports.

3. Impact of a decrease in money supply on interest rate, income, consumption, and

investment:

o Interest rate: Increases due to reduced liquidity.

o Income: Decreases as borrowing and spending decline.

o Consumption: Falls as households face higher borrowing costs.

o Investment: Declines as businesses find it costlier to finance projects.

4. New Zombie’s real GDP and economic growth rate:

o Year 1 GDP = Work Hours ×\times Productivity = 200×8=1600200 \times 8 = 1600

o Year 2 GDP = 210×10=2100210 \times 10 = 2100

o Growth Rate = (2100−1600)1600×100\frac{(2100 - 1600)}{1600} \times 100

o Growth Rate = 31.25%31.25\%

5. Money supply calculation after credit issuance:

o Required reserves = Deposits ×\times Reserve Ratio = 980×0.2=196980 \times 0.2 =

196 bln USD

o Excess reserves = Total Reserves - Required Reserves = 250−196=54250 - 196 = 54

bln USD

o Money multiplier m=1R=10.2=5m = \frac{1}{R} = \frac{1}{0.2} = 5

o Change in money supply ΔM=54×5=270\Delta M = 54 \times 5 = 270 bln USD

Variant 14

1. The Costs of Hyperinflation Hyperinflation leads to severe economic instability. It erodes

the purchasing power of money, discourages savings, and causes uncertainty in business
planning. People may shift to bartering or foreign currency, and investment levels decline
 due to unpredictable inflation rates. Governments may struggle to finance their budgets,
leading to even more inflation.

2. Difference between Frictional and Structural Unemployment Frictional unemployment

occurs when workers are in between jobs or entering the labor market. It is temporary and
results from job searching. Structural unemployment, however, occurs due to changes in
industries or technology, making some skills obsolete. Structural unemployment requires
retraining or relocation.

3. Demand-Pull vs. Cost-Push Inflation

o Demand-Pull Inflation: Arises when aggregate demand exceeds aggregate supply,

leading to price increases.

o Cost-Push Inflation: Caused by rising production costs (e.g., wages, raw materials),
which push up prices regardless of demand.

4. Calculations

o Labor Force: Total Population - (Under 16 & Institutionalized) - Not in Labor Force =
2000 - 400 - 700 = 900

o Unemployment Rate: (Unemployed / Labor Force) × 100 = (81 / 900) × 100 = 9%

5. Change in Money Demand

o Mandatory Reserves: 20% of 980 = 196 bln USD

o Excess Reserves: 250 - 196 = 54 bln USD

o Money Multiplier: m = 1 / (R/100%) = 1 / 0.2 = 5

o Change in Money Supply: ΔM = Excess Reserves × m = 54 × 5 = 270 bln USD

Variant 15

1. Quantity Equation MV = PY

o M = Money Supply

o V = Velocity of Money

o P = Price Level

o Y = Real GDP This equation shows the relationship between money supply, velocity,
and economic output.
 2. Natural Rate of Unemployment Determined by frictional and structural unemployment, the
natural rate depends on labor market policies, job mobility, technology changes, and
demographic factors.

3. Theories of Aggregate Supply

o Sticky-Wage Theory: Wages are slow to adjust, causing firms to hire more or fewer
workers in response to changes in prices.

o Sticky-Price Theory: Prices of some goods do not adjust quickly, causing short-run
fluctuations in output and employment. Both rely on market imperfections that
prevent prices and wages from adjusting instantly.

4. Response to a Supply Shock If the central bank reacts aggressively to inflation by raising
interest rates, borrowing becomes expensive, slowing economic activity. Graphically, this
shifts the aggregate demand curve left, reducing inflation but also lowering output in the
short term.

5. Change in Money Demand

o Mandatory Reserves: 20% of 980 = 196 bln USD

o Excess Reserves: 250 - 196 = 54 bln USD

o Money Multiplier: m = 1 / (R/100%) = 1 / 0.2 = 5

o Change in Money Supply: ΔM = Excess Reserves × m = 54 × 5 = 270 bln USD

Variant 16

1. Possible Effects of Falling Prices on Equilibrium Income

Falling prices can have both positive and negative effects on equilibrium income. Lower
prices can increase consumers' purchasing power, boosting aggregate demand and income.
However, if deflationary expectations arise, consumers may delay spending, reducing
aggregate demand and lowering equilibrium income. Additionally, falling prices can increase
the real burden of debt, leading to lower consumption and investment, further decreasing
income.

2. Two Ways a Recession Might Raise the Natural Rate of Unemployment

o Hysteresis Effect: Long-term unemployment can cause workers to lose skills, making
it harder for them to find jobs even after the economy recovers. This raises the
natural rate of unemployment.

o Structural Shifts: A recession may accelerate changes in industries, with some jobs
disappearing permanently. Workers may need retraining, which can keep
unemployment elevated.
 3. Phillips Curve and Aggregate Supply
The Phillips curve shows the trade-off between inflation and unemployment. In the short
run, an increase in aggregate supply lowers inflation and unemployment, moving along the
Phillips curve. In the long run, the Phillips curve becomes vertical at the natural rate of
unemployment, meaning aggregate supply changes do not affect unemployment
permanently.

4. Effect of Raising the Target Inflation Rate from 2% to 3%

o Graphical Representation: The dynamic AD-AS model would show a rightward shift
in the AD curve due to increased inflation expectations.

o Immediate Effects: The nominal interest rate may initially rise as people expect
higher inflation.

o Long-run Effects: The real interest rate may stabilize, but higher inflation could lead
to changes in wage-setting and long-term investment behavior.

5. Finding the Money Multiplier

Given:

o Monetary Base (MB) = 300

o Mandatory Reserves (R) = 130

o Money Supply (M) = 960

o Deposits (D) = 790

First, find the reserve ratio (rr):

rr=RD=130790=0.1646rr = \frac{R}{D} = \frac{130}{790} = 0.1646
Then, calculate the money multiplier (m):
m=(cr+1)(cr+rr)m = \frac{(cr+1)}{(cr+rr)}
Since cr (currency ratio) is not given, assuming cr = (MB - R)/D:
cr=300−130790=170790=0.215cr = \frac{300 - 130}{790} = \frac{170}{790} = 0.215
m=(0.215+1)(0.215+0.1646)=1.2150.3796≈3.2m = \frac{(0.215+1)}{(0.215+0.1646)} = \frac{1.215}
{0.3796} \approx 3.2

Variant 17

1. Reducing Inflation Without Causing a Recession

o Gradual Monetary Tightening: Raising interest rates slowly to reduce inflation while
avoiding a sharp decline in economic activity.
 o Supply-Side Policies: Improving productivity and reducing costs for businesses can
lower inflation without reducing demand.

2. Two Ways a Recession Might Raise the Natural Rate of Unemployment

o Skill Erosion: Long periods of unemployment reduce workers’ employability.

o Labor Market Mismatch: Structural changes in the economy may require workers to
transition to new industries, increasing unemployment.

3. Phillips Curve and Aggregate Supply

The Phillips curve represents the inverse relationship between inflation and unemployment.
When aggregate supply increases, inflation falls, reducing unemployment in the short run.
In the long run, the Phillips curve is vertical, meaning aggregate supply changes do not
impact unemployment.

4. Effect of Raising the Target Inflation Rate from 2% to 3%

o Short-Term Effect: Increased inflation expectations raise nominal interest rates.

o Long-Term Effect: The real interest rate stabilizes, but persistent inflation affects
wage-setting and investment.

5. Finding the GDP Gap Using Okun’s Law

Given:

o Frictional Unemployment = 3%

o Structural Unemployment = 3%

o Cyclical Unemployment = 10%

o Nominal GDP = 27,600

o Okun’s Coefficient = 2.5%

Total unemployment: 3% + 3% + 10% = 16%

Natural rate of unemployment: 3% + 3% = 6%
Unemployment gap: 16% - 6% = 10%
GDP Gap = Okun’s Coefficient × Unemployment Gap × Nominal GDP
GDP Gap=2.5%×10%×27,600GDP\ Gap = 2.5\% \times 10\% \times 27,600
GDP Gap=0.025×0.10×27,600=690GDP\ Gap = 0.025 \times 0.10 \times 27,600 = 690
GDP Gap = 690

Head of Department: ________________________ B.E. Mamaraximov

Variant 18
1. Four Components of GDP

o Consumption (C): Spending by households on goods and services. Example: Buying a

new car.

o Investment (I): Spending on capital goods that will be used for future production.
Example: A company purchasing new machinery.

o Government Spending (G): Government expenditures on goods and services.

Example: Infrastructure projects like road construction.

o Net Exports (NX = Exports - Imports): The value of a country’s exports minus its
imports. Example: A country exporting electronics to another country.

2. Aggregate Demand and Its Non-Factors

o Aggregate demand (AD) is the total demand for goods and services within an
economy at a given overall price level and time period.

o The non-factors (things that do not directly shift AD) include:

 The supply of natural resources

 Changes in production technology (affects AS more than AD)

 The legal framework (unless it directly impacts spending)

3. Nominal vs. Real GDP

o Nominal GDP is the total market value of all goods and services produced in an
economy, measured using current prices without adjusting for inflation.

o Real GDP is adjusted for inflation, allowing for comparison over different years.

o Example: If nominal GDP in 2020 is $2 trillion and inflation is 5%, real GDP would be
lower when adjusted.

4. Interest Rate Response to Inflation

o When the central bank increases its response of interest rates to inflation:

 Short-run: Higher interest rates lead to reduced investment and

consumption, slowing down the economy.

 Long-run: Inflation expectations adjust, leading to a potential stabilization of

the economy at a lower growth rate.

 Graphically: The AD curve shifts left as interest rates increase, lowering

demand.
 5. Unemployment Rates and GDP Gap

o Natural Unemployment Rate = (Structural + Frictional Unemployment) / Labor Force

* 100 = (5 mln + 3 mln + 3 mln) / 350 mln * 100 = 3.14%

o Actual Unemployment Rate = Total Unemployed / Labor Force * 100 = 30 mln / 350
mln * 100 = 8.57%

o GDP Gap (using Okun’s Law: GDP gap = 2 * (Actual Unemployment - Natural
Unemployment) * Potential GDP) = 2 * (8.57 - 3.14) * 4 billion = 2 * 5.43 * 4 billion =
43.44 billion dollars.

Variant 19

1. Unemployment Types and Economic Impact

o Frictional Unemployment: Temporary unemployment due to job search.

o Structural Unemployment: Mismatch between skills and job requirements.

o Cyclical Unemployment: Unemployment caused by economic downturns.

o Why it’s hard to distinguish: Some workers may experience a mix of these types
simultaneously.

o Economic Effects: Lower GDP, higher government spending on welfare.

o Non-Economic Effects: Social unrest, mental health issues.

2. Instruments of Monetary Policy

o Open Market Operations: Buying/selling government securities.

o Discount Rate: Interest rate charged to commercial banks.

o Reserve Requirements: Minimum reserves a bank must hold.

3. Why AD Curve Slopes Downward

o Wealth Effect: Lower prices increase purchasing power.

o Interest Rate Effect: Lower prices reduce interest rates, boosting investment.

o Exchange Rate Effect: Lower domestic prices make exports more competitive.

4. GDP Gap Calculation

o Natural Rate = 5%, Actual Rate = 9%

o Okun’s Law: GDP Gap = 2 * (Actual - Natural) * Potential GDP

 o GDP Gap = 2 * (9 - 5) * 500 billion

o GDP Gap = 2 * 4 * 500 billion

o GDP Gap = 4 trillion dollars.

5. Change in Money Demand

o Given: Reserves = 250 bln USD, Deposits = 980 bln USD, Reserve Ratio = 20%

o Excess Reserves = 250 - (980 * 0.2) = 250 - 196 = 54 bln USD

o Multiplier (m) = 1 / Reserve Ratio = 1 / 0.2 = 5

o Change in Money Supply = Excess Reserves * Multiplier

o Change in M = 54 * 5 = 270 bln USD.

Head of Department
_________________________ B.E. Mamaraximov