Some practice questions
1. a) Find the change in the deposits in the banking system after the Fed buys $100b in government bonds. Assume the reserve requirement is equal to .20.
b) Show the change on the balance sheet of the bank that sold the bonds to the Fed.
c) How does the Fed's action affect Y? Use the AD/SRAS/LRAS graph to illustrate your analysis.
d) Does monetary neutrality hold in this case? Compare the short run to the long run.
2. a) Assume there is a fall investment spending caused by a pessimistic outlook on the regulatory environment. How does the AD curve change? If the mpc = .60, what is the size of the shift in AD?
b) If the Congress wants to use fiscal policy in this situation, how should it act?
c) Will there be crowding out in this case? Explain.
3. Explain why quantitative easing was used by central banks during and after the Great Recession? Was this a risky policy in your opinion?
4. When is net public debt outstanding a risk to the economy?
5. Describe the lags faced by fiscal policymakers.
6. A friend argues that if a nation has a large budget deficit it must also have a large level of debt. Explain why you agree or disagree.
7. A friend claims a nation should always have a balanced federal budget. Do you agree? Why or why not.
8. How is an increase in savings a boost to the economy in the long run? How can more saving have a negative impact on the economy in the short run?
9. a) Assume the MPC =.55. What will the total impact on the AD be equal to (consider both direct and indirect effects) when there is a $400 billion increase in government spending?
b) Also, compare the overall change in Y in short run and long run equilibrium (use AS, SRAS and LRAS)
10. What are the costs and benefits of a 2% inflation target?
11. Use the information below to find
a. The unemployment rate
b. The labor force participation rate. Show all calculations.
Civilian non-institutionalized population (over 16) 150 m.
Employed 96 m.
Unemployed 10 m.
12. Which of the following workers, each living in a different area of the country, has the highest real wage? Show all calculations and explain.
Nominal wage Value of the CPI in their region
Amy $10.50 125
Bob $12.50 130
Chris $14.00 160
13. (a) Find the price of Bond A, a 1-year zero-coupon bond, which has a return of 6.6% (.066) and a face value of $1,000. Show your calculations.
(b) Would you prefer Bond A to Bond B, a 1-year zero coupon bond which sells for $910 and has a face value of $1,000. Show and explain.
(c) Would you prefer Bond A, Bond B or Bond C? Bond C is a 1-year zero coupon bonds with a face value of $500 and sells now for $470. Show and explain.
14. Assume a closed economy and let Y =$2000, C=$1300, G=$400, T =$300 and find:
Private saving __________
Budget balance __________
Investment spending __________
National saving ___________
15. What is the value of the marginal propensity to consume if consumption spending rises by $75 when income rises by $100? What the value of the spending multiplier?