Question 1

If a commercial bank has reserves of $40 million, and the reserve requirement is 10 percent, how much can the bank make in loans?

$360 million.
$400 million.
$40 million.
$36 million.
None of the above is correct.

Question 2

According to the text, if the economy were experiencing high rates of unemployment and low rates of inflation, an appropriate monetary policy strategy would most likely be:

to have the Fed sell securities on the open market.
to have the Fed buy securities on the open market.
to have the Fed buy securities on the open market while at the same time raising the reserve requirement.
unclear.

Question 3

Use the following information for this question and the next question. John passes up an offer for a job paying $50,000 a year and, instead, starts his own business. His new business brings in $160,000 in sales during the first year, and his total costs for items such as materials, labor, equipment, shipping, and insurance come to $65,000.

John's EXPLICIT costs are:

$50,000.
$65,000.
$95,000.
$115,000.
None of the above is correct.

Question 4

Use the following information (repeated from the previous question) again for this question. John passes up an offer for a job paying $50,000 a year and, instead, starts his own business. His new business brings in $160,000 in sales during the first year, and his total costs for items such as materials, labor, equipment, shipping, and insurance come to $65,000.

John's "accounting" profit and economic profit during the first year are, respectively:

$50,000, and $45,000.
$110,000, and $95,000.
$95,000, and $50,000.
$95,000, and $45,000.
None of the above is correct.

Question 5

Suppose that the reserve requirement ratio is 4% and that the Fed uses open market operations (OMO) by BUYING $200 million worth of Treasury securities. Assume that banks use all funds except required reserves to make loans and that the public does not store any cash.

A. Does this Fed action increase or decrease the money supply (all else equal)? EXPLAIN.

B. Given the information above, what is the best estimate of how much the money supply changes as a result of the Fed's action?SHOW YOUR WORK.

C. Describe another tool at the Fed's disposal to change the money supply in the same direction: tell what it is called, how it works, and how it would serve to change the money supply in the same direction as the OMO above. Why is it more likely that the Fed will use OMO instead?

Question 6

Refer to the table below to answer questions A and B.

A. Complete the table above by cutting and pasting or labeling your answers with the lowercase letters in the table cells.

B. Evaluate the following as true or false and explain, demonstrating you understand the relevant economic concept in the question:
"Diminishing marginal returns sets in with worker number 6."

Question 7

A. What is revealed about preferences and utility by observing choices that people make? Explain. Answer using evidence from required readings. 3 -6 sentences.

B. What have economists learned in recent years about limitations of the approach described in (A)? Explain. Answer using evidence from required readings. 3 -6 sentences.