Econ Tutorial

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|ECON1220 |Principles of Macroeconomics |2012-2013 | |Sections 001-004 |Tutorial Exercise 5 |2nd semester |

Short-Answer Questions

1.Suppose you deposit $1,000 at your bank, and the required reserve ratio (r) is 10%. Furthermore, assume that banks do not hold any excess reserves, and that the public do not hold any cash. Explain the money creation process that follows due to your initial deposit of $1,000, and calculate the maximum amount of money that can be created.

2.Suppose, as in Q.1, you deposit $1,000 at your bank, and the required reserve ratio (r) is 10%. Assume again, as in Q.1, that banks do not hold any excess reserves. However, now assume that the public hold half of their money as cash and half of their money as deposits. Explain the money creation process that follows due to your initial deposit of $1,000, and calculate the maximum amount of loans that can be created.

3. What is the basic objective of monetary policy? What are the major strengths of monetary policy? Why is monetary policy easier to conduct than fiscal policy?

4. Refer to the accompanying table for Moola to answer the following questions. [pic]
a)What is the equilibrium interest rate in Moola?
b)What is the level of investment at the equilibrium interest rate? c)Is there either a recessionary output gap (negative GDP gap) or an inflationary output gap (positive GDP gap) at the equilibrium interest rate, and, if either, what is the amount? d)Given money demand, by how much would the Moola central bank need to change the money supply to close the output gap? e)What is the expenditure multiplier in Moola?

Multiple Choice Questions

1.If the price index rises from 200 to 250, the purchasing power value of the dollar: A. will rise by 25 percent.
B. will rise by 20 percent.
C. will fall by 25 percent.
D. will fall by 20 percent.

2.During periods of rapid inflation, money may cease to work as a medium of exchange: A. unless it has been designated legal tender.
B. unless it is backed by gold.
C. because it is too scarce for everyone to have enough for transactions. D.because people and businesses will not want to accept it in transactions.

3.In a fractional reserve banking system:
A. bank panics cannot occur.
B. the monetary system must be backed by gold.
C. banks can create money through the lending process.
D. the Federal Reserve has no control over the amount of money in circulation.

4. Bank panics:
A. occur frequently in fractional reserve banking systems. B. are a risk of fractional reserve banking, but are unlikely when banks are highly regulated and lend prudently. C. cannot occur in a fractional reserve banking system.

D. occur more frequently when the monetary system is backed by gold.

5. A commercial bank's reserves are:
A. liabilities to both the commercial bank and the Federal Reserve Bank holding them. B. liabilities to the commercial bank and assets to the Federal Reserve Bank holding them. C. assets to both the commercial bank and the Federal Reserve Bank holding them. D. assets to the commercial bank and liabilities to the Federal Reserve Bank holding them.

6. The ABC Commercial Bank has $5,000 in excess reserves and the reserve ratio is 30 percent. This information is consistent with the bank having: A. $90,000 in outstanding loans and $35,000 in reserves. B. $90,000 in checkable deposit liabilities and $32,000 in reserves. C. $20,000 in checkable deposit liabilities and $10,000 in reserves. D. $90,000 in checkable deposit liabilities and $35,000 in reserves.

7. When a check is drawn and cleared, the
A. reserves and deposits of both the bank against which the check is cleared and the bank receiving the...
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