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Free Response

Free Response. Macro Unit #4. e). a). $10,000 Banks could not lend out money Fed money is “new” money. Required Reserves. Deposits. $100,000. $1,000,000. d). Money Supply would increase by less: Banks would lend less money out Money Multiplier works on less dollars.

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Free Response

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  1. Free Response Macro Unit #4

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

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

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

  5. Free Response Problem #4 • MV = PQ • No change in real output. • Double • 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

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