BUSN 1008 Introductory Macroeconomics
1. Using the balance sheet below for a commercial bank
explain how much if any this bank can expand its lending if the required
reserve ratio is 20%.
2. Draw the demand and the supply for money and identify the
equilibrium interest rate. Make sure to draw a money supply curve that is
independent of the interest rate. Draw the curves so that the equilibrium
interest rate is 8%. Explain why interest rates above or below 8% are not
stable.
3. Explain with the use of a graph why the shape of the
money demand curve makes a difference in terms of the effectiveness of monetary
policy.
4. Use a graph to illustrate the effect an expansionary
fiscal policy will have on the money market. What happens to the interest rate?
What impact will this have on the effectiveness of fiscal policy?
5. Graphically illustrate the impact of a decrease and
increase in the interest rate on aggregate expenditure. On your graph,
illustrate the impact of an increase and decrease in the interest rate upon
aggregate expenditure. Summarize the relationship among changes in the rate of
interest (r), the change in planned investment spending (me), its impact on the
aggregate expenditure function (AE), and the multiple effects on income (Y).
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