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Question one
The gold standard is a system where a standard currency unit is a fixed of gold. The currency can be converted freely domestically or abroad.
The positives of gold standard
• It prevents the government from causing inflation through use of paper currency
• It provides a fixed pattern of foreign exchange
The negatives of gold standard
Gold standard may not provide adequate flexibility in the supply of money.
The country may not protect itself from inflation or deflation.
Question two
The monetary policy specifically in the US is conducted by US Federal Reserve. They should be independent of politics. The US Federal Reserve is free from politics. Independent central reserve is very important for achieving ultimate goals of economic stability (Cohn, 2007).
Question three
The monetary tools include open market operations, discount rates, minimum reserves and regulation of foreign exchange.
• Open market operations: The government uses this policy to sell when there is excess money supply or by its securities from the public when there is a shortage in the money supply.
• Discount rates: The Federal Reserve controls the money supply by setting the rates with the view to control the money supply.
Question four
The crisis of 2008 is the period of great recession where the US housing prices fell by 31.8 % with poor economic performance. Securities that were mortgaged backed required them as collateral. The derivatives gave rise to a high demand for more mortgages (Cohn, 2007)
TARP are programmes created by US Treasury to stabilize its financial system.

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Computations/Modeling
Question one
PAS

AD2

AD1

Q2Q1
The quote is true according to Keynes since the prices are flexible upwards and not downwards.
Question two
The increase in savings will lead to a decrease in marginal propensity to save in the short run. The Federal Reserve will have more powers in conducting fiscal policy because of the increase in disposable income.
Question three
a. When prices shift upwards, there will be a shortage of oil due to hoarding and the equilibrium will also shift upwards.
b. The Federal Reserve will respond by adjusting prices upwards to avoid hoarding.
c. There will decrease short-term investment d. Yes. Policy changes are very important in times of crisis. Furthermore, the model has weaknesses since there are other factors that influence demand.
Question 4
MPC = (60/100)×100 = 0.6
Expenditure multiplier = 1/(1-0.6)= 2.5
This is expansionary fiscal policy because the multiplier is greater than one.

Price

Q1Q2quantity
Changes in the long run involves capita while changes in the short run involves labor
The long run is the duration in which everything possible of changing has, and the entire costs of every option are felt.
Question five
(10/100)×1200 = $120
1200-120 = $1080
1080×2 = $2160
(1080×2)+(120×2) = $2400
15%×1200 = 180
Increase will be 180-120 = $60
Question six
Price

C
B
P1
A

Q1 Q0 Q2Quantity
If the government increase money supply the aggregate demand will shift from Q0 to Q1.
Equilibrium will move from point B to C as a result of sumulteneous increase in demand and supply.
The nominal wages at point C are higher than wags at point A
The real wages of point A are lower than the real wages of point B. Consequently, the real wages of point C are higher than real wages at point A.
The analysis is consistent with the proposition that money has a real effect in the short run but neutral in the long run.
Question seven.

Interest AS
i
I’
AS
QMQuantity of money demanded
The increase of interest rate results to a corresponding increase in the quantity of money.
The price will come back to equilibrium.
Question Eight AD2

price BAD1

A
AS2
AS1
Quantity demanded

The policy of one year tax cut will have a great impact on consumer spending than permanent tax cut. This is because the market forces will restore the equilibrium.

Reference
Cohn, S. (2007). Reintroducing macroeconomics. Armonk, N.Y.: M.E. Sharpe.
Cohn, S. (2007). Reintroducing macroeconomics. Armonk, N.Y.: M.E. Sharpe.

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