Economics Answers

Assume that the banking system is loaned up and that any open-market purchase by the Fed directly increases reserves in the banks. If the required reserve ratio is 0.2, by how much could the money supply expand if the Fed purchased $2 billion worth of bonds?

The average consumer divides his expenditure between food, clothing, accommodation and transport in the ratio 2 : 1 : 4 : 3. During the course of a year, the price of food falls by 2 %, the price of clothing increases by 4 %, the price of accommodation increases by 10 % and the price of transport remains constant. Assuming that the weights of a price index reflect the expenditure of the average consumer, what is the increase in the index over the year?
A 2.5 % B 4 % C 10 % D 12 %

At the start of 2009, a worker earned $100 a week. In 2009, the Retail Price Index (RPI) rose 4 % and his average wage rose 7 %. In 2010, the RPI fell 3 % and his wage fell 2 %. What happened to his real wage between the start of 2009 and the end of 2010?
It fell by less than 5 %.
It fell by more than 5 %.
It rose by less than 5 %.
It rose by more than 5 %.

Which of the following would not be considered a conventional monetary policy by the Fed:
(a) selling T-Bills
(b) purchasing Mortgage Bonds
(c) lowering the discount rate
(d) changing the reserve requirement

20 points. Suppose the Fed's target for the federal funds rate moves from 0.5% (current value) to
2%. Using the appropriate graphs carefully explain:
(a) How can the Fed attain such increase in the FFR? HINT: you have to use the graph for the
(interbank) market of reserves
b) What is the impact of such change on total spending in the economy? HINT: you have to use the graph with the total expenditure and the 45 degree line.
c) What is the impact on equilibrium output Y and the price P? HINT: you have to use the AD-AS graph

Consider a bank where total loans are equal to $800 million and required reserves are $40
million, and where the reserve requirement is 10%.

a) Fill the bank's balance sheet, assuming that it does not hold excess reserves
b) Write the formula for the money multiplier and compute its value. How does it depend on the
reserve ratio? Negatively or positively?
c) Suppose that the Fed injects $80 billion of new reserves into the banking system. Given the
money multiplier computed in b., how large would be the total change in money supply in the
whole banking system?

For given increase in the supply of reserves to banks by the Fed, the drop in the federal funds rate
(FFR)
(a) is larger the more sensitive to the FFR the demand for reserves (by banks) is
(b) is larger the less sensitive to the FFR the demand for reserves (by banks) is
(c) does not depend on how sensitive to the FFR the demand for reserves (by banks) is
(d) is equal to the total change in the supply of reserves

The Nottinghamshire Research Observatory in England calculated that students who attend Nottingham Technical University spend about £2,760 each in the local economy for a total of £50.45 million. In total, the impact of their spending on the local economy is £63 million. Calculate the size of the student spending multiplier

Suppose going to college costs 20,000 a year. The average earnings of a highschool graduate are 20,000 a year. By going to college, suppose one can expect to earn 50,000 a year. Set up the expressions for the present value of benefits and costs, and the net present value of a college education if the interest rate is 10%.


How does this change if the interest rate is 15%? Why is the investment in college less attractive when the interest rate is high?

You have been hired as an economic consultant to assess the potential of profitably entering the market for gourmet coffee (examples are Starbucks and Coffee Bean). The firm that has hired you would like for you to make your recommendations on what are the most important factors that must be considered in order to successfully penetrate the market. The firm also wants your advice (in addition to production of the coffee itself) on its interest in opening several distribution or sales points. It would like to have your recommendation on the factors that would be most beneficial to determining the correct location and size for the outlets.

Determine and discuss the most probable market structure of the coffee industry; then prepare a proposal which will be presented to the firm that is hiring you as consultant.

What corrective action does the budget audit consider?