Problem Set III – Econ 101 B Fall 2013

Due Date: Tuesday Oct. 22nd 5 p.m. – with Hints and Corrections

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1. Download the following time-series from FRED:

Reserve Balance Requirements (RESBALREQ).

Currency Component of M1 (CURRENCY).

Excess Reserves of Depository Institutions (EXCRESNS).

Total Checkable Deposits (TCDNS).

and from them calculate and graph the money multiplier for the U.S. from February of 1984

to today. Be sure to label you graph carefully.

2. What happened to the multiplier during the most recent recession and what are the

implications of this change for using the multiplier as a tool for monetary policy?

3. Create a graph of the following time series using monthly data from Jan 2007– August 2013.

Monetary Base (BOGMBASE)

Excess Reserves (EXCRESNS)

Fed’s Purchases of Treasury Securities (WOHOSNB)

Fed’s Purchases of MBS (WSHOMCB)

(Note: Define “asset purchases”= WOHOSNB + WSHOMCB)

What changed in Sep 2008? Later, you’ll need to explain why the Fed is doing what it’s

doing. For now, you should be able to describe what it doing in terms of the 3-parties that

determine the money supply. Refer to the graphs you just made to answer the following.

(Hint: Just because M1 and the money multiplier are not listed above, feel free to include

them if it helps you answer the questions below.)

How much did the Fed increase its asset purchases between August 2008 and December

2008?

What effect did this have on the monetary base?

What has happened to the monetary base since December 2008?

Has M1 grown as much as the monetary base? Why or why not? What does this have to

do with the money multiplier?

4. Using the Quantity Theory of Money, derive an expression for the rate of inflation for the

case when the velocity of money is not a constant and use it to explain the pre-1990 and post-

1990 curves on slide 41 of lecture 10.

5. Beginning with the second equation for Y in the middle of slide 27 of lecture 12, carry out the

algebra needed to obtain the equation for the IS curve.

6. In our derivation of the IS curve we made the simple assumption that taxes are completely

autonomous: . A more realistic tax function would be one where taxes increase with

income as described by . Follow the steps you undertook in the earlier question

with this more realistic tax function to derive a new equation for the IS-curve.

Problem Set III – Econ 101 B Fall 2013

Due Date: Tuesday Oct. 22nd 5 p.m. – with Hints and Corrections

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7. This problem is about business cycles, peaks and troughs.1 Start with Jan 1948 (or 1948Q1)

data and answer the following questions. See the appendix for what graphs should (sort of)

look like.

a) Using monthly data, what is the average increase in the unemployment rate from dated

peaks to dated troughs?

b) Use Real GDP (quarterly, chained 2009 dollars) and compute the average percent decline

in real gdp, one quarter, two quarters, three quarters, and four quarters after the dated

peaks. (see graphs on next page).

c) Use Real GDP (quarterly, chained 2009 dollars) and compute the average increase in real

gdp for quarters 1,2,3,4,…,8. Compare the performance of this recovery to the average.

(see graphs on next page)

d) Repeat (b) and (c) using nonfarm payroll employment. You may use months rather than

quarters, since payroll data is reported monthly. (Note: the graphs produced below used

quarterly averages of monthly data. Fred allows you to specify frequency. To convert to

quarterly from monthly, select “quarterly” on the download page. Finally, if you use

monthly data you’ll need to change the reference period to months.)

e) How does the Great Recession and US economic performance through 2012Q4 (Dec

2012) compare to the average? A graph is not required, but it’ll make your answer

clearer.

1 Reference: http://www.nber.org/cycles.html. Data can be found on the St. Louis Fed’s “Fred” website.

http://research.stlouisfed.org/

Problem Set III – Econ 101 B Fall 2013

Due Date: Tuesday Oct. 22nd 5 p.m. – with Hints and Corrections

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Appendix – Business Cycle Reference Graphs

Real GDP Relative to Peaks and Troughs

Problem Set III – Econ 101 B Fall 2013

Due Date: Tuesday Oct. 22nd 5 p.m. – with Hints and Corrections

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Employment Relative to Peaks and Troughs