Johns Hopkins Carey Business School The Firm and the Macroeconomy BU 220.610.F2 Fall 2, 2013, Quiz 2 on Chapters 3, 4 and 5 Instructions: Please answer all questions. Time: 20 minutes An economy's factors of production and its production function determine the economy's: A) labor force participation rate. B) budget surplus or deficit. C) population growth rate 1D) output of goods and services. AK®*L® and A, K, and L are all 100, the marginal product of capital is: A) 50. B) 100. ©) 200. D) 1000. Ina neoclassical economy, if consumption increases as the interest rate decreases, then a $10 billion rise in government spending would A) still crowd out exactly $10 billion of investment. B) crowd out between zero and $10 billion of investment. €) not crowd out any investment. D) crowd out more than $10 billion of investment. If the monetary base equals $400 billion and the money multiplier equals 2, then the money supply equals: A) $200 billion. B) $400 billion. ©) $800 billion. D) $1,000 billion, Page 15, Ifyou hear in the news that the Federal Reserve conducted open-market purchases, then you should expect, to increase. A) B) ° D) reserve requirements the discount rate the money supply the reserve-deposit ratio, Use the following to answer question 6: ‘Bank Balance Sheet [Assets Liabilities & Net Worth eserves, $ 10,000] Deposits $100,001 [Loans 100,000] Debt 20,00 Securities 40,000[__Equit; 30,001 6. (Table: Bank Balance Sheet) Based on the table, what is the reserve ratio at the bank? A). 3 percent B) 5 percent C) 10 percent D) 15 percent 7. Ifthe Federal Reserve increases the interest rate paid on reserves, banks will tend to hold ___ excess reserves, which will the money multiplier. A) more; increase B) more; decrease C) fewer: increase D) fewer: decrease 8. Explain at least three factors that will affect the quantity of reserves that a bank wishes to hold. 9, Although “inflation is always and everywhere a monetary phenomenon,” explain why athe start ofa hyperinflation is typically related to the fiscal poliey situation, and b._ the end of a hyperinflation is usually related to changes in fiscal policy. Page 210. Assume that the demand for real money balance (M/P) is M/P = 0.6Y— 100i, where Fis national income and i is the nominal interest rate (in percent). The real interest rate r is fixed at 3 percent by the investment and saving functions. The expected inflation rate equals the rate of nominal money growth. a. If Fis 1,000, Mis 100, and the growth rate of nominal money is | percent, what must i and P be? b. If Fis 1,000, Mis 100, and the growth rate of nominal money must j and P be? 2 percent, what Page 3Answer Key eA anEeNe wanamrs Banks’ demand for reserves will be affected by: (1) legal reserve requirements, (2) the size and regularity of customer deposits and withdrawals, (3) the interest rate paid on reserves relative to alternative bank investments, and (4) the number of bank failures and level of uncertainty in the economy a. Hyperinflations frequently begin when governments require additional revenue from seigniorage because tax revenue and/or government borrowing is insufficient to cover government spending, The additional seigniorage is obtained by printing money, which leads to hyperinflation. b. Hyperinflations usually end when fiscal policy changes, including tax increases and government spending cuts, are made to eliminate the need for seigniorage and stops the excessive increase in money. 4 percent, P= 1/2 5 percent, P= 1 Page 4