Question 1. Define any key terms that you feel are important in answering the following question as they are defined in the textbook and explain, in your own words what those definitions mean (5 points), and then thoroughly analyze each of the following changes in the market for loanable funds to answer the these questions Use the diagrams below, resizing them as necessary, to illustrate your analysis in explaining what happens to private savings, private investment spending, and the rate of interest if the following events occur. Assume the economy is closed (no transactions are made with foreign countries).
a. The government reduces the size of its deficit to zero
b. At any given interest rate, consumers decide to save more. Assume the budget balance is zero .
c. At any given interest rate, businesses become very optimistic about the future profitability of investment spending. Assume the budget balance is zero .
Question 2. Define any key terms that you feel are important in answering the following question as they are defined in the textbook and explain, in your own words what those definitions mean (5 points), and then thoroughly analyze each situation to answer the following questions.
Using aggregate demand, short-run aggregate supplies, and long-run aggregate supply curves, explain the process and causes by which each of the following economic events will move the economy from one long-run macroeconomic equilibrium to another. Use the diagrams below, resizing them as necessary, to illustrate your analysis. In each case, what are the short-run and long-run effects on the aggregate price level and aggregate output?
a. There is a decrease in households’ wealth due to a decline in the stock market .
b. The government lowers taxes, leaving households with more disposable income, with no corresponding reduction in government purchases .
3. Define any key terms that you feel are important in answering the following question as they are defined in the textbook and explain, in your own words what those definitions mean (5 points), and then thoroughly analyze each situation to answer the following questions.
An economy in a hypothetical country is in long-run macroeconomic equilibrium when each of the following aggregate demand shocks occurs. What kind of gap—inflationary or recessionary—will the economy face after the shock, and what type of fiscal policies, giving specific examples, would help move the economy back to potential output?
a. A stock market boom increases the value of stocks held by households .
b. Firms come to believe that a recession in the near future is likely .
c. Anticipating the possibility of war, the government increases its purchases of military equipment /
d. The quantity of money in the economy declines and interest rates increase
4. The table below shows the United States components of M1 and M2 in billions of dollars for the month of December in the years 1998 to 2007 as published in the 2008 Economic report of the President.
Year Currency in circulation Traveler's checks Checkable deposits Money market funds Time deposits smaller than $100,000 Savings deposits M1
M2
Currency in circulation as a percentage of M1
Currency in circulation as a percentage of M2
1998 460.5 8.5 626.5 728.9 952.4 1,605.0
1999 517.8 8.6 596.2 819.7 956.8 1,740.3
2000 531.2 8.3 548.0 908.0 1,047.6 1,878.8
2001 581.2 8.0 592.6 962.3 976.5 2,312.8
2002 626.3 7.8 585.6 885.3 896.0 2,778.2
2003 662.5 7.7 635.9 777.4 818.7 3,169.1
2004 697.6 7.5 671.2 697.1 829.9 3,518.3
2005 723.9 7.2 643.4 699.9 995.8 3,621.4
2006 748.9 6.7 611.4 799.4 1,170.4 3,698.6
2007 759.0 6.3 599.2 976.1 1,216.8 3,889.8
For a., b., c., & d., you may insert a completed Excel spreadsheet with your answers, if you wish.
a. Complete the table by calculating M1 (5 points),
b. Calculating M2 (5 points),
c. Calculating currency in circulation as a percentage of M1 (5 points) , and
d. Calculating currency in circulation as a percentage of M2 (5 points).
e. Examining the following three charts and your completed table, what trends or patterns in:
- M1,
- M2,
- currency in circulation as a percentage of M1, and
- currency of circulation as a percentage of M2 do you see (5 points)?
f. What might account for these trends (10 points)?
5. Considering the flow of money throughout a country’s economy and the importance of the proper level of money supply, answer the following questions.
a. Discuss how money is created within the banking system (15 points)
b. Discuss how in the United States, the Federal Reserve uses monetary policy to control the money supply. (15 points)
6. Your spouse, or someone else very close to you, has brought you a magazine article on the economy that has the following five graphical depictions of the state of our economy. Knowing that you have just completed an economics course at Kaplan, they ask you what each one means. For each of the following graphs, write a paragraph briefly, but thoroughly, explaining what you would tell that person about what that graph means and why it is important. (Each paragraph is worth a maximum of 6 points, for a total of 30 points.)
1. Gross Domestic Product
Explanation:
2. Components of Gross Domestic Product
Explanation:
3. Taxes, Surpluses/Deficits & National Debt
Explanation:
4. Consumer Price Index
Explanation:
5. Unemployment Rate
Explanation: