1. Suppose that the money supply is currently $500 billion and Fed wishes to increase it by $100 billion. Given a reserve ratio of 0.25 what should it do?
2. Determine the impact on each of the following if 2 million formerly unemployed workers decide to return to school full time and stop looking for work:
a. The labor force participation rate
b. The size of labor force
c. The unemployment rate
3. Suppose that the U.S. non institutional adult population is 230 million and the labor force participation rate is 67%.
a. What would be the size of the U.S. labor force?
b. If 85 million adults are not working, what is the unemployment rate?
4. Explain how each of the following changes the money supply.
a. the Fed buys bonds
b. the Fed raises the discount rate
c. the Fed raises the reserve requirement
5. Draw a simple T-account for First National Bank which has $5,000 of deposits, a required reserve ratio of 10 percent, and excess reserves of $300. Make sure you balance sheet balances.
6. Suppose a country the total holdings of banks were as follows:
Required reserves = $45 million
Excess reserves = $15 million
Deposits = $750 million
Loans = $600 million
Treasury bonds = $90 million
Show that the balance sheet balances if these are the only assets and liabilities.
Assuming that people hold no currency, what happens to each of these values if the central bank changes the reserve requirement ratio to 3%, banks still want to hold the same percentage of excess reserves, and banks don’t change their holdings of Treasury bonds? How much does the money supply change by?
7. Suppose that there is an excess supply of economics professors. Should universities necessarily reduce salaries? What does standard economic theory suggest? What does efficiency-wage theory suggest?
9. Following the recession of 2001 there was a month where employment and the unemployment rate rose. Assuming the computations were correct how is it possible for both to have increased?
10. Demonstrate that whether you would prefer to have $225 today or wait five years for $300 depends on the interest rate. Show your work.
11. As the interest rate increases, what happens to the present value of a future payment? Explain why changes in the interest rate will lead to changes in the quantity of loan able funds demanded and investment spending.
12. Lucy puts $400 into an account when the interest rate is 10 percent. Later she checks her balance and finds its worth about $708.62. How many years did she wait to check her balance?
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Sra
As shown in the graph below, the economy starts in equilibrium at point E1 with interest rate r1 and equilibrium quantity of saving and investment at q1. If the government succeeds in obtaining a surplus, there will be more public saving in the economy and so more national saving at each interest rate, and the supply of loanable funds curve will shift from S1 to S2. The new equilibrium will be at E1, with a lower interest rate, r2 and a higher quantity of saving and investment, q1. Hence, if the federal government succeeds in having a surplus, interest rates will fall and investment will increase.
Market for Loanable Funds