Free Response
Macro Unit #4
Free Response Problem #1
a)
Assets
Required Reserves
Loans
b)
$100,000
d)
Liabilities
$1,000,000
Deposits
Money Supply would increase by less:
Banks would lend less money out
Money Multiplier works on less dollars
$900,000
Total Assets
Total Liabilities
$1,000,000
$1,000,000
$10,000 Deposit
$9,000
Excess Reserves
1/.10 = 10 Multiplier
$9,000 * 10 = $90,000
c)
$10,000 Deposit
$9,000
Excess Reserves
1/.10 = 10 Multiplier
$9,000 * 10 = $90,000 + $10,000 = $100,000
e)
$10,000
Banks could not lend out money
Fed money is “new” money
Free Response Problem #2
a)
Assets
b)
Liabilities
Required Reserves $2,000
Assets
Deposits
$20,000
Required Reserves $1,800
$18,000
Loans
Loans
Total Assets
$20,000
$18,000
Deposits
$16,200
Total Liabilities
Total Assets
$20,000
$18,000
c)
Assets
Required Reserves $1,620
Loans
Liabilities
Liabilities
$16,200
Deposits
$14,580
Total Assets
$16,200
Total Liabilities
$16,200
Total Liabilities
$18,000
Free Response Problem #3
E)
A)
Price
Level
LRAS
----------
P1 ----------P2 --------
SRAS 1
A
Y2 Y1
B) Contractionary
1
i2
AD2
AD 1
MS 2
Nominal
Interest
Rate
MS1
---------
i1 -----------
MD
Qty of $
Real
GDP
C) i) R.R. increases ii) Disc. Rate increases iii) Sell Bonds
d) Fed Sells Bonds => MS => Interest Rates
=> Investment
=> AD
=> GDP
Free Response Problem #4
a) MV = PQ
i) No change in real output.
ii) Double
iii) Double
Explanation: Qty theory of money claims Money is neutral and Velocity is constant.
Therefore an increase in money supply will increase price level by the same amount.
(one doubles, the other must double)
A double of the price level will double nominal output (P * Q)
B) If the Velocity of money fell 50%, then real money supply also declined by 50%
So you would double the money supply which would keep real output the same
Example: M = 10 V =2
MV = 20
M=10
V = 1 = MV = 10
c) i) Nominal rates must rise 5%
ii) real rates remain unchanged
According to the Fisher effect real interest rates are constant:
Real i-rates = nominal rate – expected inflation