Problem Question
- Draw a graph depicting interest rates at the quantity of loanable funds (such as the graph in figure 15.7). Answer the following questions regarding this graph.
- Explain why the demand of loanable funds is upward sloping.
- Explain why the supply of loanable funds is downward sloping.
- If the Federal Reserve sells government bonds, show what will happen to this graph. Explain the effects on interest rates and the quantity of loanable funds.
- If the Federal Reserve lowers the required reserve rate, show what will happen to this graph. Explain the effects on interest rates and the quantity of loanable funds.
- List and explain the logic behind the “four functions of money.” Then, consider the following: In many prisons, cigarettes are used as money. Do cigarettes in prison have the ability to satisfy
- these four functions? Explain.
- For each of the following questions, evaluate whether the statement is “true” or “false”. Then, provide a brief explanation to justify your answer.
- If the velocity of money increases and nothing else changes, nominal GDP will rise.
- If the required reserve rate is 5%, bank runs will be more likely than if the required reserve rate is 20%.
- If the required reserve rate is increased from 10% to 20%, the amount of money in society will double.
- If the value of M1 increases and nothing else changes, the value of M2 will also increase.
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