Macroeconomics Assignment 3

Macroeconomics Class Assignment 3

Name: Sun Dianyong

Student ID: 1600015965

Problem 1. Readings: Look at the newspapers and magazines for the past few weeks. Are there any discussions about economic fluctuations or corresponding policies? How do you interpret these discussions?

Answer: Industrial investment and consumption fell across the board in August 2017, above-scale industrial added value actually increased 6.0% year on year, felled 0.4 percentage points from July. The mining industry continues to maintain a negative range, and the rate of decline is significantly faster.

My interpretation: The data reflects the short-term impact of production capacity and environmental inspection on the economy, but also reflects the transformation of China's economy from quantitative growth to quality growth. The economy is still in a stable channel. After the 19th CPC national congress, China's efforts to start monetary tightening is limited. More and more institutions forecasts that China attaches importance to economic stability, the economy will remain stable slowdown.

Problem 2.  An economy begins in long-run equilibrium, and then a change in government regulations allows banks to start paying interest on checking accounts. Recall that the money stock is the sum of currency and demand deposits, including checking accounts, so this regulatory change makes holding money more attractive.

a)        How does this change affect the demand for money?

Answer: Since the government allows banks to pay interest on checking accounts, holding money becomes more attractive now, thus the demand for money would increase.

b)        What happens to the velocity of money?

Answer: From the money demand function, we can recognize that

[pic 1]

Since Y is determined by labor and capital, and there is no information for us to conclude that money supply has changed, the output level Y should remain constant.

Then we can reasonably arrive at the conclusion that k has increased, which just implies people want to hold more money for every dollar of income. With the correlation

[pic 2]

We can conclude that the velocity of money decreases.

c)        If the Fed keeps the money supply constant, what will happen to output and prices in the short run and in the long run?

Answer: As the Fed keeps the money supply constant, the velocity of money decreases, from the money quantity equation

[pic 3]

We can find that a proportionate reduction in the nominal value of output PY happens. For any given price level, the amount of output is lower, and for any given amount of output, the price level is lower. As in the following figure shows, the aggregate demand curve relating P and Y shifts inward.[pic 4]