Let’s Talk About Uni.

Want to work your brain a bit? Here’s the Macroeconomics Problem Set for this week. Enjoy!

1. Government spending in the CIA model:
a. Summarise the effects on output and employment of a temporary increase in government expenditure in the cash-in-advance model that is financed through lump-sum taxes.
b. How does your answer change if the government decides to pay for the increase in spending by an (unexpected) one-time increase in the money supply instead?
c. Finally, how does your answer change if the government finances the increase in spending by permanently raising the growth rate of the money supply.

2. The zero bound on nominal interest rates: Use the money demand model discussed in lectures to answer the following questions. Suppose we have an economy in which the nominal interest rate is currently zero (i.e. R=0).
a. What is the equilibrium quantity of credit card balances in this economy?
b. What is the equilibrium quantity of money demand in this economy? (Hint: Consider whether the transaction constraint is binding or not.)
c. In what sense does the economy run more efficiently when R=0 rather than with R>0?

3. The Friedman rule: Suppose that consumers are concerned about theft, so they want to use credit card services for some of their transactions even if the nominal interest rate is zero. How would the Friedman rule for monetary policy be altered under those circumstances?