Chapters 14, 15, 17 Review

1. Suppose the current money supply is $4,000. For each of the following situations, determine the following: the money multiplier, the monetary base, and the amount by which the Fed must change the reserve requirementto achieve the stated desired change in the money supply.

a.The reserve requirement is 0.2. The Fed wants to decrease the money supply by $800.

b.The reserve requirement is 0.5. The Fed wants to increase the money supply by $1000.

2. Suppose the current money supply is $10,000. For each of the following situations, determine the following: the monetary base, and what open market operation(selling/buying bonds) the Fed would have to take to achieve the stated desired change in the money supply.

a.The reserve requirement is 0.1. The Fed wants to decrease the money supply by $800.

b.The reserve requirement is 0.5. The Fed wants to increase the money supply by $1000.

3.Use the Taylor Rule to predict the Fed’s target for the Federal funds rate in the following situations:

a. Inflation is 3%, which is 1% above the target; output growth is 4%, which is 1% above potential.

b. Inflation is 2%, which is the target rate; output growth is 4%, which is 1% above potential.

c. Inflation is 1%, which is 1% below the target; output growth is 2%, which is 1% below potential.

4. Explain the effect of expansionary monetary policy in the short run in the AS/AD model. Be sure to explain why the curve shifts.

5. Given each of the following situations, state whether the yield curve is invertedor standard.

a.The yield on 1-year bonds is 4.0%, and the yield on 30-year bonds is 3.8%.

b.The yield on 10-year bonds is 6.1%, and the yield on 20-year bonds is 9.9%.

c.The yield on 3-year bonds is 3.9%, and the yield on 10-year bonds is 4.1%.

d.The yield on 15-year bonds is 4.0%, and the yield on 20-year bonds is 3.3%.

6.What are the three stages of a financial crisis? Briefly explain how each stage played out differently during the Great Depression and the Crisis of 2008.

7.State whether each of the following is an example of herding, leverage, or extrapolative expectations:

  1. People think it is a good idea to buy Beanie Babies because so many other people are doing it.
  1. As they see the price of Beanie Babies rises, people figure that they must be a wise investment.
  1. People begin to use their credit cards to buy Beanie Babies.
  1. People take out loans to buy Beanie Babies.
  1. People reason that, since Beanie Babies have increased in popularity so much in just one year, they will be even more popular in another year.

8. Fill in the following table, identifying the three phases of getting out of a financial crisis, and give one specific example of government’s approach to each phase for both the Great Depression and the Crisis of 2008.

Phase / An Example from
the Great Depression / An Example from
the Crisis of 2008
1. ______
2. ______
3. ______

9. Suppose in Year 0, the U.S. government debt was $5,605 billion. Given the revenues and expenditures listed below, calculate government surplus or deficit and the accumulated debt.

Year / Revenue
(in millions) / Expenditures
(in millions) / Deficit/Surplus
(in millions) / Debt
(in billions)
Year 1 / $2,025 / $1,789 / ______/ ______
Year 2 / $1,991 / $1,864 / ______/ ______
Year 3 / $1,839 / $1,956 / ______/ ______
Year 4 / $1,793 / $2,096 / ______/ ______
Year 5 / $1,932 / $2,212 / ______/ ______

10. For each of the following situations, calculate the real deficit:

a.Inflation is 3%; debt is $5 trillion; the nominal deficit is $200 billion.

b.Inflation is 5%; debt is $3 trillion; the nominal deficit is $100 billion.

c.There is 2% deflation; debt is $2 trillion; the nominal deficit is $50 billion.