Quiz 7 - Due Tues Nov 6

Quiz 7 - Monetary Economics (15-17)
Professor Matthew Festa
EC207 - Intro to Macroeconomics
Due in Class Nov 6, 2007

1) (2 points) - Identify whether each of the following items is counted in M1 only, M2 only, both M1 and M2, or neither

a) A $1000 balance in a transaction deposit at a bank
b) $50,000 certificate of deposit (CD) at your bank
c) $200,000 certificate of deposit (CD) at your bank
d) $50 traveler's check
e) $500 worth of stock in Google.

2) a)(1 point) The required reserve ratio is 20%. What is the potential money multiplier?
b) (1 point) If the Fed injects $10 million dollars into the banking system, what is the maximum the economy can expand?

3) (2 points) Draw the liquidity preference graph (money demand and money supply). Name the 3 tools of the Federal reserve? Which is the one they use the most?

4) (2 points) The Fed says they plan on cutting 25bps of the tool they use the most. Show the effect on the graph. Tell me whether the equilibrium interest rate and quantity of money will be higher or lower?

5) (2 points) Explain the equation MV=PY. Assuming that Y and V are fixed, what will happen if the Fed continually increases M? Is this a classical or Keynesian argument? Show the effect on an AS/AD graph.