1. Free Response
Macro Unit #4

2. 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, Deposit
$9, Excess Reserves
1/.10 = 10 Multiplier
$9,000 * 10 = $90,000 c)
$10, Deposit
$9, Excess Reserves
1/.10 = 10 Multiplier
$9,000 * 10 = $90,000 + $10,000 = $100,000

3. 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)

4. 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

5. 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 = 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