Reference no: EM13933698
Answer the questions using economic theory and facts.
1. Assume that a bank receives a cash deposit of $9,000 from Tom.
(a) What is the immediate impact of this transaction on the money supply? Explain.
(b) Suppose that the reserve requirement is 10 percent and banks voluntarily keep an additional 10 percent in excess reserves. Calculate the following:
(i) The maximum amount by which this bank will increase its loans from the transaction above.
(ii) The maximum increase in the money supply that will be generated from the transaction above.
(c) If the public decides to hold some money in the form of currency rather than in demand deposits, how will this influence the change in the money supply that was determined in part (b)(ii)? Explain.
(d) Assume that the government increase spending by $9,000, which is financed by a sale of bonds to the central bank.
(i) What will happen to the money supply?
(ii) What will happen to money demand?
Now, assume that the Federal Reserve decides to target a lower federal funds rate.
(e) What open market operation can the Federal Reserve use to achieve the lower target?
(ii) Given your answer to part (e)(i), what will happen to the price of government bonds?
(f) Using a correctly labeled graph of the money market, show the effect of the open market operation from part (e)(i) on the nominal interest rate.
(g) Assume that the Federal Reserve buys government bonds from commercial banks. Based only on this transaction, will the level of required reserves in the commercial banks increase, decrease, or remain the same?
(g) Another monetary policy action involves changing the discount rate. Define the discount rate.
2. Below you will find a table of a bundle of outputs and prices of goods in the US.
(a) Calculate this year's nominal gross domestic product (GDP).
(b) Assume that in the US the GDP deflator (GDP price index) is 100 in the base year and 150 this year.
Calculate each of the following:
(i) The inflation rate, expressed as a percentage, between the base year and this year
(ii) This year's real GDPNow, use the following table to answer the questions below concerning Chile's GDP.
(c) Assuming that 2010 is the base year, calculate each of the following:
(i) The nominal gross domestic product (GDP) in 2010 and 2014
(ii) The real GDP in 2014
(d) If in one year the price index is 40 and in the next year the price index is 55, what is the rate of inflation from one year to the next?
(e) Now suppose that nominal GDP in 2003 totals $8546 billion and rises to $13.1 trillion ten years later for the United States. The GDP deflator for 2003 is 1.85 and for 2013 is 2.75, in what year is real GDP greater? By how much? How did you arrive at this conclusion? Show all work and fully explain your reasoning. Explain why measuring GDP in real terms is important.
(f) Now consider the following information for the U.S.: During 2014, consumption expenditures increased by $20.5 billion, gross private domestic investment declined by $8.8 billion, and government expenditures increased by $14.4 billion. In addition, the country experienced a trade deficit of $3.2 billion. Did the U.S.'s GDP increase or decrease during this year? By how much? Show all work and fully explain your reasoning.Based on the Paul Volcker and Financial Crisis cases, please answer the following questions:
3. (a) What were the causes of the 1978-1979 banking crisis? Cite references where appropriate.
(b) State what the Federal Reserve's operating procedure of 1979 was. Why did they implement this procedure? Discuss the actions of Paul Volcker and the Federal Reserve based on their operating procedure of 1979 and monetary decision making policies enacted to combat the banking system situation of the time. What effects did those actions have on the banking system and Why? Fully explain and provide sound economic analysis (theory and facts). Please site references where appropriate (especially the case) and add any corresponding charts and graphs within this document.
(c) What were the causes of the 2007-2008 financial crisis? Cite references where appropriate.
(d) State what the Federal Reserve's operating procedures were in 2008. Why did they implement these procedures? Discuss the actions of Ben Bernanke and the Federal Reserve based on their operating procedure of 2008 and monetary decision making policies thereafter enacted to combat the banking system situation of the current time. What effects did those actions have on the banking system? Fully explain and provide sound economic analysis (theory and facts). Please site references where appropriate (especially the case) and add any corresponding charts and graphs within this document.