parisamohsen

Unit 5 Review FRQs - Long-run Consequences of Stabilization Policies

FRQ # 1

Janet Smith deposits $1,000 of her cash holdings in her checking account at First Federal Bank. The reserve requirement is 20 percent and the bank has no excess reserves.

1. What is the immediate effect of her deposit on the money supply? Explain why.
   
   
2. What is the maximum amount of money First Federal can initially loan out? Explain how you determined this amount.
   
   
3. What is the maximum amount of money the entire banking system can create? Explain how you determined this amount.
   
   
4. Give one reason why the money supply may not increase by the amount you identified in (c).

FRQ # 3

Assume that the United States economy is currently operating below the full-employment level of real gross domestic product with a balanced budget

1. Using your knowledge of the AS/AD graph where would the current output and price level be?
   
   
2. The United States government increases spending on goods and services by $100 billion, which is financed by borrowing. How will the increase in government spending affect each of the following?
1. Cyclical unemployment 
2. The Natural Rate Of Unemployment
   
   
3.  If the marginal propensity to consume is equal to 0.75, calculate the maximum possible change in real gross domestic product that could result from the $100 billion increase in government spending.
   
   
4. Using a correctly labeled graph of the loanable funds market, what would be the  effect of the $100 billion increase in government spending on the real interest rate.
   
   
5.  Based on the real interest rate change in part (d), what is the effect on the long-run economic growth rate? Explain.
   
   
6. Now assume that instead of financing the $100 billion increase in government spending by borrowing, the United States government increases taxes by $100 billion. With this equal increase in government spending and taxes, will the real gross domestic product increase, decrease, or remain the same? Explain.