Homework Frqs - Solutions

8/16/2019 Homework Frqs - Solutions

1/3

HOMEWORK FRQS

Mr. Maurer Name: __________________________

AP Economics (Macro)

Unit 3: Money, Banking, and Monetary Policy

FRQ #7

In Country Z, the required reserve ratio is 10 percent. Assume that the central bank

sells $50 million in

overnment securities on the open market.

!a" Calculate each o# the #olloin.

!i" %he total chane in reserves in the bankin system & '$50 million.

!ii" %he ma(imum possible chane in the money supply '$500 million.

!b" )sin a correctly labeled raph o# the money market, sho the impact o#

the central bank*s bond sale on the nominal interest rate.

!c" +hat is the impact o# the central bank*s bond sale on the equilibrium price

level in the short run %he equilibrium price level ill #all.

!d" As a result o# the price level chane in part !c", are people ith -(ed

incomes better o, orse o, or unaected /(plain. eople ith -(ed incomes are

better o because loer prices ill increase their real aes.

!b"


2/3

HOMEWORK FRQS

Mr. Maurer Name: __________________________

AP Economics (Macro)


FRQ #10

1. Assume that the United States economy is in a severe recession with no infation.

(a) Usin! a correcty a"eed a!!re!ate demand and a!!re!ate su##y !ra#h$ show each of the

foowin! for the economy.

(i) %u&em#oyment out#ut

(ii) 'urrent out#ut eve

(iii) 'urrent #rice eve

(") he federa !overnment announces a maor decrease in s#endin!. Usin! your !ra#h in #art (a)$

show how the decrease in s#endin! wi affect each of the foowin!.

(i) *eve of out#ut

(ii) Price eve

(c) E+#ain the mechanism "y which the decrease in !overnment s#endin! wi affect the

unem#oyment rate. he decrease in !overnment s#endin! wi reduce a!!re!ate demand$ which wi

ower out#ut$ increasin! unem#oyment.

(d) he %edera ,eserve #urchase "onds throu!h its o#en&mar-et o#erations.

(i) Usin! a correcty a"eed !ra#h$ show the effect of this #urchase on the interest rate.

(ii) E+#ain how the chan!e in the interest rate wi affect out#ut and the #rice eve.

he reduction in the interest rate wi increase investment s#endin!$ increasin! a!!re!ate demand and

increasin! the #rice eve.

(a) (") (d)(i)


3/3

HOMEWORK FRQS


FRQ #4

A drop in credit card #ees causes people to use credit cards more o#ten #or

transactions and demand less money.!a" )sin a correctly labeled raph o# the money market, sho ho the

nominal interest rate ill be aected.!b" iven the interest rate chane in part !a", hat ill happen to bond prices

in the short run2ond prices ill increase.

!c" iven the interest rate chane in part !a", hat ill happen to the pricelevel in the short run /(plain. %he price level ill increase because loer interestrates ill lead to an increase in investment spendin, leadin to an increase inareate demand.

!d" Identi#y an open'market operation the 3ederal 4eserve could use to keepthe nominal interest rate constant at the level that e(isted be#ore the drop in credit

card #ees. /(plain. %he 3ederal 4eserve could sell securities, decreasin the money supply

to raise interest rates to their previous level.

!a"

Documents

Homework Frqs - Solutions