Econ 1102: Principles of Macroeconomics



Name:___________________ Class Time:____________________

Midterm # 2

“Principles of Macroeconomics”

NSCC - Fall 2006

Professor: Moonsu Han

Total of 25 Pts.

Question 1 Bring definitions for following terms. (Total 4 pts. 1 pt. each)

1. Federal Funds Rate:

2. Crowing Out:

3. Expansionary Fiscal Policy:

4. Monetary Policy:

Question 2 What is the difference between fiscal policy and monetary policy? (Hint: Need to explain details of both policy details.) (4 pts.)

 

Question 3 If the US economy is heading towards a recession then what kind of monetary and should the Fed pick and what kind of fiscal policy the government pick? Explain details. (4 pts.)

 

Question 4 Why should the central bank be independent from the government? Bring examples to support your arguments. (4 pts.)

 

Question 5 If the Fed sold government bonds, then what happens to interest rate. (Use the supply and demand graph to explain your conclusion) (3 pts.)

Question 6 Consider the following simplified balance sheet for a bank. (Total 2 pts.)

|Assets |Liabilities |

|Reserves $1.3 million |Deposits 10 million |

|Loans $8.7 million | |

a. If the required reserve ratio is 10%, how much in excess reserves does this bank hold?

b. If the bank makes the maximum amount loan with excess reserves, how much money will be created? (Hint: You may want to use money multiplier.)

Question 7 Suppose that this year’s money supply is $50 billion, nominal GDP is $1.8 trillion, and price level is 3. (Total 4 pts.)

1. What is the real GDP? What is the velocity of money? (2 pts.)

2. Suppose that velocity is constant and the economy’s output of goods and services rises by 3.5% each year. What will happen to nominal GDP and the price level next year if the Fed increases the money supply by 3%? (2 pts.)

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