Free Response Macro Unit #4

Free Response Problem #1 Assets Liabilities $100,000 $1,000,000 Total Assets Total Liabilities Deposits Required Reserves Loans $900,000 a) d) Money Supply would increase by less: Banks would lend less money out Money Multiplier works on less dollars e) $10,000 Banks could not lend out money Fed money is “new” money b) $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

Free Response Problem #2 Assets Liabilities $2,000 $20,000 Total Assets Total Liabilities Deposits Required Reserves Loans $18,000 a) Assets Liabilities $1,800 $18,000 Total Assets Total Liabilities Deposits Required Reserves Loans $16,200 b) Assets Liabilities $1,620 $16,200 Total Assets Total Liabilities Deposits Required Reserves Loans $14,580 c)

Free Response Problem #3 MS1 ----------- MD Nominal Interest Rate Qty of $ MS 2 --------- i i1 E) LRAS 1 Price Level Real GDP AD SRAS ----------- ---------- A AD2 P1 -------- Y2 P2 Y1 A) B) Contractionary C) i) R.R. increases ii) Disc. Rate increases iii) Sell Bonds d) Fed Sells Bonds => MS => Interest Rates => Investment => AD => GDP

c) i) Nominal rates must rise 5% Free Response Problem #4 MV = PQ No change in real output. 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