Short Answer Questions:
1. Watch the 2009 BBC news video at: http://news.bbc.co.uk/2/hi/business/7924506.stm. Answer the following questions, providing explanations:
a. What is ‘quantitative easing'? (Hint: see P.911 of textbook).
b. Why did Britain, the USA, Japan, the European Monetary Union and others embark on it in early 2009 but not Australia?
c. What is the one great fear of quantitative easing? You must use the quantity equation to support your argument.
2. The World's Best Bank (WBB) is the only bank in the country and its T-account is:
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Assets (in $ million) Liabilities (in $ million)
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Reserves 300 Deposits 600
Loans 200
Cash held in overseas banks 100 Debt 200
Securities 300 Capital (owner's equity) 100
a. What is WBB's reserve ratio?
b. What is the implied money multiplier?
c. What is WBB's leverage ratio?
d. Suppose a foreign depositor withdraws $100 from his WBB account and transfers the funds to his overseas account. What happens to WBB's reserve ratio? What happens to the money supply?
e. Going back to the original T-account (i.e. the withdrawal of part d. did NOT take place), Suppose that due to the mortgage crisis some people default on their loans, and their value thus decreases by 50. What happens to the leverage ratio (assuming the bank makes no changes in reserves)?
3. Based on what you have studied so far in macro1, discuss and describe some aspects of macroeconomics that can be useful in your future (yes, it can be anything we have discussed in this course). Your discussion should be more than half a page in length (please do not copy and paste the sentences from the course guide!)