1. ?According to the Rule of 72 (Table 17.1), how many years will it take for GDP to double if the economy is growing at
?(a) 1.5 percent a year?
?(b) 2.8 percent a year?
2. On a graph, draw the consumption function C = $200 + 0.75YD and the 45 degree line.
You may use Excel to do it or just use a ruler to do it manually.
(a) At what level of income do households begin to save? Designate that point on the graph with the letter A.
(b) By how much does consumption increase when income rises $200 beyond point A? Designate this new level of consumption with point B.
(c) Illustrate the impact on consumption of an increase in consumer confidence.
3. Suppose that furniture production encompasses the following stages:
Stage 1: Trees are sold to lumber company. ?$ 8,000
Stage 2: Lumber is sold to furniture company. ?$17,000
Stage 3: Furniture company sells furniture to retail store. ?$28,000
Stage 4: Furniture store sells furniture to consumer. ?$56,000
(a) What is the value added at each stage?
(b) How much does this output contribute to GDP?
(c) How would answer (b) change if the lumber were imported from Canada?
6. ?Assume the banking system contains the following amounts:
?Total reserves $80 billion
?Transactions deposits $800 billion
?Cash held by public $100 billion
?Reserve requirement 0.10
(a) Are the banks fully utilizing their lending capacity? Explain why.
?What would happen to the money supply initially if the public deposited another $30 billion of cash in transactions accounts?
?What would the lending capacity of the banking system be after such a portfolio switch?
(b) How large would the money supply be if the banks fully utilized their lending capacity?
?What three steps could the Fed take to offset that potential growth in M1?