H8

TOPIC C – posted Wednesday – Help out a fellow classmate

(1) Assuming these numbers from the Federal Reserve Bank, now assume that the public deposited another $15 billion in cash in transactions accounts. 

Total reserves:                           $35 billion
Transactions deposits:             $650 billion
Cash held by public:                $250 billion
Required reserve ratio:            0.05

a. How large would the money supply be if the banks fully utilized their lending capacity?

b. How much would the total lending capacity of the banking system be after this portfolio switch?

(2) Suppose the Federal Reserve decided to sell $20 billion worth of government securities in the open market. How will the lending capacity of the banking system be affected if the reserve requirement is 5 percent?

(3) From the end of 2006 to the end of 2007, M1 increased from $1,373 billion to $1,434 billion

a. By what percentage did M1 increase?

b. If the Fed had used a fixed rule of 3 percent growth of the money supply, how large would M1 have been in 2007?

(4) Washington, D.C.—The U.S. Congress gave final approval to President Obama’s $787 billion stimulus package yesterday. The $787 billion package is intended to give a boost to the economy, lifting it out of the current recession. If consumers had an MPC of 0.90, by how much would aggregate demand have eventually increased with Obama’s spending stimulus, assuming the stimulus was entirely government spending?

TOPIC B – posted Monday

1. Provide an example of fiscal stimulus. What is the reason for this government expenditure?
2. What is the “multiplier process” when government spending increases?
3. If consumers spend 98 cents out of every extra dollar received, what is the “marginal propensity to consume”?
4. How does the Federal Reserve’s cash reserve requirement affect the economy?
5. The buying and selling of government bonds to influence reserves in the banking system is the responsibility of the _________?
6. By raising or lowering the _______, the Fed changes the cost of money for banks, which impacts the incentive to __________?

TOPIC A – posted Sunday

1. In early 2018 businesses bought more inventory, increasing GDP. What would happen if consumers didn’t buy those goods?
2. When consumers use tax cuts to increase their own spending, what kind of “extra” purchases are they likely to make?
3. Which is likely to give the economy a greater boost, household tax cuts or business tax cuts? 
4. Would a constitutional amendment that would require the federal government to balance its budget (incur no deficits) be desirable? Explain.
5. What government programs would you cut in the pursuit of fiscal restraint?
6. What is the difference between fiscal and monetary policy?  Give examples of each.