1. Recall our discussion of Federal Funds rate determination in the market for reserves. Suppose the Fed conducts an open market sale with the intention of contracting the money supply. On a graph of the market for reserves, show what curve shifts and in what direction. At the new reserve market equilibrium is the Federal Funds rate higher or lower?
2. Suppose the Fed sells $100 worth of bonds to the nonbank public (a person or firm). The person or firm pays for the securities with currency on hand. Display the changes in assets and liabilities for both the Fed and the member of the nonbank public. If the currency to checkable deposits raio is 0.40, the required reserve ratio is 10%, and the ratio of excess reserves to checkable deposits is 0.08, what is the change in the money supply due to this open market sale?
3. Suppose that the US economy is in long run equilibrium when the Fed conducts expansionary monetary policy. Display this change on a liquidity preference (Keynesian money supply/money demand) graph and an aggregate demand/aggregate supply (AD/AS) graph. Describe the changes in output and the price level that occur in the short run and long run.
4. Suppose record heat across the US during the summer causes natural gas and electricity prices to skyrocket in most major markets in which firms purchase these forms of energy. Using the aggregate demand/aggregate supply (AD/AS) framework, what will happen to the US economy in the short run if it is initially in long run equilibrium? What will happen in the long run? What kind of activist policies might the government want to pursue instead of waiting for the economy to adjust to a new long run equilibrium on its own?
5. Describe what is meant by the terms structural unemployment, frictional unemployment, and seasonal unemployment.
6. If you are a classical economist who believes that the velocity of money is fairly constant in the short run, by how much do you expect nominal national income to change if the money stock in the economy doubles (holding real income fixed)?
7. Suppose that real national income, Y, is currently $500 billion, the overall price level, P = (CPI/100), is 1.41 (I'm just converting nominal dollars into real dollars using the consumer price index with respect to some base year in which CPI = 100; that is, I'm inflating real income to account for inflation that has occurred since the base year), and the constant of proportionality, k, is 1.35. According to the Cambridge approach to money demand, what is the current level of money demand? How would you expect the constant of proportionality, k, and money demand to change if the expected return on bonds goes up?
8. What is the aggregate demand curve (define it)? Does it slope upward or downward? Why? What is the short-run aggregate supply curve (define it)? Does it slope upward or downward? Why?
9. Suppose the US economy is initially in long run equilibrium. Over the next time period, economic growth occurs (the full-employment level of output increases). How would you represent this change in the AD/AS framework? What happens to the aggregate demand curve and short run aggregate supply curve in the long run after this expansion of full employment output?
10. List the primary goals of the Fed in setting monetary policy.