Instructions: Choose any 4 of these 7 problems. For each one, carefully consider all parts of the problem, answer each part completely, and show your work. Your responses should not exceed four pages total in length. Please use 1.5 or double spacing. I encourage you to include any graphs or tables you might find helpful in your explanations. For each question, please write the question number and the question itself (e.g. copy and paste) above your response. 1. Consider an economy in which the marginal propensity to consume is 0.85, and an increase in investment of $200. a. How much of that will be saved (in the first round of spending)? b. What is the multiplier? c. How much will be spent over the course of time? d. How do your above answers change if the people saved another 5 cents on the dollar? 2. Using the Aggregate-Demand Aggregate-Supply, fully describe how the following process affects overall output and prices in the long run and in the short run: Having been mired in a recession since the early days of the COVID-19 pandemic, the United States issues large stimulus checks to small businesses in April 2021 following the beginning of mass administration of a (presumably effective) vaccine for the virus. The aim of these stimulus checks is to allow these businesses to take advantage of the new increase in consumers willingness to spend money in public places. 3. Suppose Congress passes a bill to relieve all college debt up to $50,000. What effects is this likely to have on aggregate demand, output, and prices? How will the timing lags (see chapter 33) manifest themselves in this example? How will this impact the national debt? 4. Why is the United States (and most developed economies) able to maintain a money supply that is not backed by any commodity or intrinsically valuable material? What are the primary qualities in money, and why do they apply to paper currency with no backing? 5. What impact will each of the following transactions have on (A) the size of Money Supply M1, and (B) the size of Money Supply M2: a. Alan withdraws $100 from his checking account as cash. b. Brynn withdraws $100 from her savings account as cash. c. Carla transfers $100 from her savings account to her checking account. d. DeShaun moves funds from a Money Market Mutual Fund into his savings account. e. Erica withdraws $10,000 from her savings account to immediately make a down payment on a car loan. 6. Suppose a group of investors put together $300,000 to form Vita Bank, which now has those $300,000 as assets, and the investors own stock shares totaling that same amount. How will the following events appear on Vitas balance sheet? a. The purchase of $270,000 worth of property. b. The addition of $120,000 in deposits after the doors open to the public. Now consider Vitas willingness to create loans using their excess reserves. If the required reserve ratio is 5%, how many deposits can Vita create on its own? How much will it need to maintain in reserves? 7. Suppose the Federal Reserve wants to increase the money supply by $6 billion. Will the Fed want to purchase or sell non-liquid assets on the open market? If the reserve ratio is 10%, what quantity (in dollars) will it buy or sell? What impact will this have on interest rates, investment spending, and aggregate demand?
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