Mr. MaurerName: ______

AP Economics (Macro)

Chapter 15 Problem Set

1. What is the name of the United States’ central bank?

2. If the economy is experiencing significant unemployment, what policy options would the Federal Reserve be likely to take in each of the following areas? Explain your answer.

a. Open market transactions:

b. The reserve ratio:

c. The discount rate:

3. Identify three specific actions the Federal Reserve can take to shift the Aggregate Demand curve to the left. What net result do all of these three actions have in common? When would the Federal Reserve take such actions?

4. Complete the following table:

Monetary Policy Options / Fiscal Policy Options
Problem / Easy Money or Tight Money? / Specific Federal Reserve Action (Choose one) / Expansionary or Contractionary Fiscal Policy? / Specific Govt. Action (Choose One)
High inflation
High unemployment
Recession
Rapidly rising prices
Declining GDP
Weak aggregate demand
Sluggish investment spending

5. Identify one fiscal policy option and one monetary policy option that the U.S. Government and the Federal Reserve could take in combination to try to bring the economy out of recession.

6. What will be the effect on each of the following of either a expansionary or a contractionary monetary policy by the Federal Reserve?

ExpansionaryContractionary

a. interest rates______

b. investment spending______

c. aggregate demand______

d. output and price level______
(Assume prices are not “sticky.”)

7. If the reserve ratio is 20%, and the Federal Reserve buys $50 billion in government securities from the public, what is the maximum possible increase in the money supply?

8. Assume that the economy is operating at full employment. Policymakers want to increase investment spending without any increase in the price level. Which combination of monetary and fiscal policy would be best (choose expansionary or contractionary for each). Explain your answer.

9. What specific monetary policy does the Federal Reserve use to lower the federal funds rate? Explain how this works.

10. In the short run, what effect will an expansionary monetary policy have on output and the price level?

11. Identify three monetary policy actions the Federal Reserve can take to combat recession.

12. If the Federal Reserve buys bonds in an open market operation, what will be the effect on bond prices, interest rates, and investment spending?

13. If the Federal Reserve sells bonds in an open market operation, what will be the effect on bond prices, interest rates, and investment spending?

14. If nominal gross domestic product in a country is $2000 and the money supply is $500, what is the velocity of money?

15. For which of the following sets of unemployment and inflation rates (Unemployment, Inflation) will a central bank be mostreluctant to increase the rate of growth in the money supply?

(A) 5%, 10%(B) 10%,5%(C)10%, 10%(D) 5%, 5%(E) 10%, 2%

16. Does monetary policy become more or less effective when investment spending becomes more responsive to changes in the interest rate? Explain. What concept from microeconomics does this involve? To help you answer, draw two graphs of investment demand (see pages 160-161). Draw one graph that shows investment demand that is very responsive to changes in the interest rate. Draw one graph that shows investment demand that is very unresponsive to changes in the interest rate. What we’re really talking about here (remembering back to micro) is the ______of investment demand.

17. If a country’s central bank increases it sales of government bonds on the open market, what problem is it likely responding to? Explain.

18. Assume that the economy of Canada is operating above full employment. If the Canadian central bank wants the economy to operate in long-run equilibrium, what open market operation should the central bank initiate?

19. In Country Z, the required reserve ratio is 10 percent. Assume that the central bank sells $50 million in government securities on the open market.

(a) Calculate each of the following.

(i) The total immediate change in reserves in the banking system

(ii) The maximum possible change in the money supply

20. In Country X, the required reserve ratio is 20 percent. Assume that the central bank buys $50 million in government securities on the open market.

(a) Calculate each of the following.

(i) The total immediate change in reserves in the banking system

(ii) The maximum possible change in the money supply