MACRO HW VII

Cllnftu* t3 d. A common unit for measuring the value of every good or service

in the economy is known as a(n)

-' - 5. (Fiat Money)Most economists believe that the better fiat money

serves as a store of value, the more acceptable it is' What does this

statement mean? How could people lose faith in money?

6. (The Value of Money)When the value of money was based on its gold content, new discoveries 0f gold were frequently followed

by

. periods of inflation, ExPlain.

13-2 Explain what is meant bY a fractional reserue banking system

t. (Depository lnstitutions)Whalis a depository institution' and what types of depository institutions are found in the United States?

How

do they act as intermediaries betvveen savers and borrowers? Why

do theY PlaY this role?

8. (Depository lnstitutions)Explain why a bank typically holds as reserves only a fraction of its deposit liabilities? ln light

of this

. arrangement, why is it important that depositors have confidence in their bank's health?

13-3 Describe the Fed, summarize its wo mandated objectives, and outline some of its other goals

(Federal ReserveSysteml What are the main powers and responsi-

bilities of the Federal Reserve System? What are its two mandates

and some of it's other goals?

13-4 Describe subPrime mortgages and the role they PlaYed in the financial crisis of 2008

(d u**,re Mortgages)Vtlhat are subprime mortgages' and whatv iote did they play in the financial crisis of 2008?

11, (Bank Deregulationl Some economists argue that deregulat-

ing the interest rates that could be paid on deposits combined

with deposit insurance led to the insolvency of many depository

institutions during the 1980s. 0n what basis do they make such

an argument?

GHAPTER 14 14-l Interpret why using a debit card is like using cash, but using a credit card is not

't. (Credit vs. Debit Cards) Explain why using a debit card is just like using cash, while using a credit card is different'

z. (Monetary Aggregates)Calculate Ml and M2 using the following information:

Large-denomination time deposits

Currency and coin held by the non-banking public

Checkable dePosits

Small-denomination time deposits

Traveler's checks

Savings deposits

Money market mutual fund accounts

$304 billion

$438 billion

$509 billion

$198 billion

$18 billion

$326 billion

$637 billion

3,34 PROBLEMS APPENDIX

14-2 Explain why a bank is in a better posi$oh to lend your savings than you are

2. (Bank Expeftise)Why a banks in a better position to make loans than would be a typical saver? Describe a bank's expertise in

this area'

l. (Reserve Accounts) Suppose that a bank's customer deposits $4,000 in her checking account, The required reserve

ratio is

O.Zf Wnat are the required reserves on this new deposit? What is

the largest loan that the bank can make on the basis of the new

deposit? lf the bank chooses to hold reserves of $3,000 on the

new deposit, what are the excess reserves on the deposit?

14-3 Describe how banks create money

t. (Money CreatronlSuppose BankA, which faces a reserve requirement 0f.10 percent, receives a $1,000 cash deposit

from a customer. r a. Assuming that it wishes to hold no excess reserves, determine

how much the bank should lend. Show your answer 0n Bank As

balance sheet.

b. Assuming that the loan shown in Bank A's balance sheet is

redeposited in Bank B, show the changes in Bank B's balance

sheet if it lends out the maximum possible'

c. Repeat this process for three additional banks: C, D, and E'

d. Using the simple money multiplier, calculate the total

change in the money supply resulting from the $1 ,000 initial

deposit.

e. Assume Banks A, B, C, D, and E each wish to hold 5 percent

excess reserves. How would holding this level of excess

reserves affect the total change in the money supply?

(Money Multiptierl Suppose that the Federal Reserve lowers

the required reserve ratio from 0,10 to 0.05 How does this

affect the simple money multiplier, assuming that excess

reserves are held to zero and there are n0 currency leakages?

What are the money multipliers for required reserve ratios of

0.15 and 0,20?

(Money Creation)Show how each of the following would initially

affect a bank's assets and liabilities.

a, Someone makes a $10,000 deposit into a checking account'

b. A bank makes a loan of $1,000 by establishing a checking

account for $1 ,000.

c. The loan described in part (b) is spent.

d, A bank must write off a loan because the bonower defaults'

t. (Money Creatr'onl Show how each of the following initially altecls bank assets, liabilities, and reserves. Do notinclude the results of

bank behavior resulting from the Fed's action Assume a required

reserve ratio of 0.05.

a. The Fed purchases $1 0 million worth of U S' government bonds

from a bank.

b. The Fed loans $5 million to a bank.

c. The Fed raises the required reserve ratio to 0 1 0'

14-4 Summarize the Fed's tools of monetary PolicY

(Monetary lools)What tools does the Fed have to pursue monetary

policy, Which tool does it use the most?

(Monetary Control)Suppose the money supply is currently $500

billion and the Fed wishes to increase it by $100 billion.

a. Given a required reserve ratio of 0.25, what should it do?

b. lf it decided to change the money supply by changing the

required reserve ratio, what change should it make? Why may

the Fed be reluctant t0 change the reserve requirement?

GHAPTER 15 is-r rxplain how the demand and supply of money determine the market interest rate

(Money Demand) Suppose that you never cany cash. Your pay-

check of $1,000 per month is deposited directly into your check-

ing account, and you spend your money at a constant rate so that

at the end of each month your checking account balance is zero,

a. What is your average money balance during the pay period?

b, How would each of the following changes affect your average monthly balance?

i, You are paid $500 twice monthly rather than $1,000 each month.

ii, You are uncertain about your total spending each month. iii. You spend a lot at the beginning of the month (e.9., for rent)

and little at the end of the month.

iv. Your monthly income increases. (Market lnterest Rate) Vtlihh a diagram, show how the supply of

money and the demand for money determine the rate of interest?

Explain the shapes of the supply curve and the demand curve.

15-2 Outline the steps betureen an increase in the money supply and an increase in equilibrium output l. (Money and Aggregate Demanil)Would each of the following

increase, decrease, or have no impact on the ability of open-mar-

ket operations to affect aggregate demand? Explain your answer.

a. lnvestment demand becomes less sensitive to changes in the interest rate.

b. The marginal propensity to consume rises.

c. The money multiplier rises.

d. Banks decide to hold additional excess reserves.

e. The demand for money becomes more sensitive to changes in

the interest rate.

4. (Mlnetary Pllicy and Aggregate Supply) Assume that the economy is initially in long-run equilibrium. Using an /D-lSdiagram, illus- trate and explain the short-run and long-run impacts of an increase

in the money supply.

s. (Monetary Policy and an Expansionary Gap) Suppose the Fed wishes to use monetary policy to close an expansionary gap.

a. Should the Fed increase or decrease the money supply?

b. lf the Fed uses open-market operations, should it buy or sell government securities?

c. Determine whether each of the following increases, decreases, or remains unchanged in the short run: the market interest rate, the

quantity of money demanded, investment spending, aggregate

demand, potential output, the price level, and equilibrium real GDP

&

o

15-3 Describe the relevance of velocity's stability on monetary policy a. (Equation of Exchange)Calculate the velocity of money if real

GDP is 3,000 units, the average price level is $4 per unit, and

the quantity of money in the economy is $1 ,500. What happens

to velocity if the average price level drops t0 $3 per unit? What

happens to velocity if the average price level remains at $4 per unit

but the money supply rises to $2,000? What happens to velocity

if the average price level falls to $2 per unit, the money supply is

$2,000, and real GDP is 4,000 units?

t. (Quantity Theory of Money)What basic assumption about the velocity of money transforms the equation of exchange into the

quantity theory of money? Also:

a. According to the quantity theory, what will happen to nominal GDP if the money supply increases by 5 percent and velocity

does not change?

b. What will happen to nominal GDP if, instead, the money supply

decreases by 8 percent and velocity does not change?

c. What will happen to nominal GDP if, instead, the money supply increases by 5 percent and velocity decreases by 5 percent?

d. What happens to the price level in the short run in each of these three situations?

15-4 Summarize the specifrc policies the Fed pursued during and after the Great Recession

(Great Recession) How did the Fed try to bring the econorny back dur-

ing and after the Great Recession? What specif ic policies did it pursue.

(Money Supply Versus lnterest Rate largefs, Assume that the

economy's real GDP is growing.

a. What will happen t0 money demand over time?

b. lf the Fed leaves the money supply unchanged, what will hap- pen to the interest rate over time?

c. lf the Fed changes the money supply to match the change in money demand, what will happen to the interest rate over time?

d. What would be the effect 0f the policy described in part (c) on

the economy's stability over the business cycle?

(Quantitative Easrng)What's the difference between ordinary open-

market purchases and quantitative easing?

(Quantitative Easing)Because of quantitative easing, the Fed

purchased more than two trillion dollars of financial assets. Why did

the Fed do this? How are these purchases reflected on the Fed's

balance sheeP And why hasn't this increased the rate of inflation,

at least not as of December 201 3?

GHAPTER 15 16-l Outline the diffierence betr,rreen active policy and passive policy and explain how the two approaches differ in their assumptions about how well the economy works on its own t. (Active Versus Passive Polr'cyl Discuss the role each of the following

plays in the debate between the active and passive approaches:

a. The speed of adjustment of the nominal wage

b. The speed of adjustment of expectations about inflation

PROBLEMS APPENDIX 335