1. Figure below shows the Lorenz curves for 2013 and 2014 in Econland.

(a) Which of the years has the more equal distribution of income?

(b) Suppose that the area A=150, B=150 and area C=300. Calculate the Gini coefficient for 2013 and 2014.

Gini coefficient for 2013=

Gini coefficient for 2014=

2. Suppose that the central bank of Macroland set the required reserve ratio at 20%. Refer to the current balance sheet of the central bank to answer the following questions.

(a) What is the simple deposit multiplier?

b) What is the amount of required reserves that the bank is holding?

(c) How much excess reserves does the bank have?

Currency $2,000 Small-Denomination Time Deposits $1,000
Checking Account Balances $3,000 Noninstitutional Money Market Fund Shares $7,000
Savings Account Balances $5,000

3. Consider the below information for a simple economy. Assume there are no traveler's checks.

(a) What is the amount of M1 in this simple economy?

(b) What is the amount of M2 in this simple economy?

4. The economy of Mizland is characterized by: the money supply is $4 trillion, the price level is 16 and real GDP is $10 trillion.

(a) Given the above information, find the velocity of money using the quantity equation. Show your works.

(b) In this economy, if the money supply is growing at a rate of 5%, real GDP is growing at a rate of 3%, and velocity is constant, what will the inflation rate be?

5. If there is a rumor that First bank has been suffering a large amount of loss in earnings, and it may bankrupt next month, what situation do we expect to happen? What is this situation called in the textbook?

6. Use the money demand and money supply model to show graphically and explain the effect on interest rates of the Federal Reserve's open market purchase of Treasury securities. Label the axes& curves and mark important points on the graph.

7. Consider the following hypothetical situation: The table below shows what the values for real GDP and the price level will be if the Fed does not use monetary policy:

Year Potential GDP Real GDP Price Level
2014 $16 trillion $16 trillion 200
2020 $20 trillion $19 trillion 220

(a) If the Fed wants to keep the real GDP at its potential level in 2020, should it use an expansionary policy or contractionary policy? Should the New York Fed buy treasury bills or sell them?

(b) Suppose the Fed's policy is successful in keeping real GDP at its potential level in 2020. State whether each of the following would change (higher or lower) if the Fed had taken no action at all.

1) Real GDP

2) Potential Real GDP

3) The Natural Rate of Unemployment

8. Describe the immediate change to M1 and M2 in the following scenarios.

(c) If Dan deposits $500 cash in his checking account. What is the immediate change to M1 and M2 due to this transaction?

(d) Brian woke up in the morning, and transfer $100 from his savings account to his checking account. What is the immediate change to M1 and M2 due to this transaction?