Macroeconomics Answers

Commercial banks in Country A hold no excess reserves. The required reserve ratio is 0.1. The central bank of Country A has become concerned about a steep decline in investment spending.

Include correctly labeled diagrams, if useful or required, in explaining your answers. A correctly labeled diagram must have all axes and curves clearly labeled and must show directional changes. If the question prompts you to “Calculate,” you must show how you arrived at your final answer.

Commercial banks in Country A hold no excess reserves. The required reserve ratio is 0.1. The central bank of Country A has become concerned about a steep decline in investment spending.

(a) Calculate the simple money multiplier. Show your work.

(b) Identify an open market operation that Country A’s central bank is likely to implement to address the decline in investment spending.

(c) Draw a correctly labeled graph of the money market and show the effect of the central bank’s policy identified in part (b) on the nominal interest rate.

(d) Explain the effect of the change in part (c) on aggregate demand in the short run.

Indicate in each of the following instances whether specified events would cause a worker to want to work more or fewer hours

A. The wage rate rises and the substitution effect is greater than the income effect.

B. The wage rate falls and the income effect is greater than the substitution effect.