Microeconomics

07 Jul Microeconomics

For multiple choice questions, circle the letter of the ONE best answer.

1. (6 points) When we examined interest rate behavior in the United States, it was shown that interest rates decreased significantly from 2008 to 2009. In terms of the loanable funds market, which combination of changes in the supply of and demand for loanable funds could best explain this?

A. A decrease in supply of and a decrease in demand for loanable funds.

B. A decrease in supply of and an increase in demand for loanable funds.

C. An increase in supply of and an increase in demand for loanable funds.

D. An increase in supply of and a decrease in demand for loanable funds

2. (6 points) If the Federal Reserve wanted to use its monetary policy tools to decrease the money supply, it could:

A. buy bonds, reduce the discount rate, or reduce reserve requirements.

B. sell bonds, reduce the discount rate, or reduce reserve requirements.

C. sell bonds, increase the discount rate, or increase reserve requirements.

D. buy bonds, increase the discount rate, or increase reserve requirements.

3. (6 points) When the Federal Reserve sells U.S. Treasury securities (i.e. bonds) to the public, it directly:

A. increases the M1 money supply, and increases the reserves in the banking system.

B. increases the M1 money supply, while reducing the reserves in the banking system.

C. reduces the M1 money supply, while increasing the reserves in the banking system.

D. reduces the M1 money supply, and reduces the reserves in the banking system.

4. (8 points) In recent years, the Social Security Administration has increased the retirement age from age 65 to age 67. Based on the concept of consumption smoothing, what impact is this change in the retirement age likely to have on the supply of loanable funds? Provide support for your answer.

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ECON121 Homework Problem Set #2 – Spring 2018

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5. (8 points) Suppose you buy a bond on March 8, 2018 for $1,000 that pays you interest at 8% annually ($80 per year). The bond you purchased matures on March 8, 2028. Next year, on March 8, 2019, you decide you want to travel during Spring Break and choose to sell the bond you purchased last March to pay for your trip. You’re pleasantly surprised that you were able to sell your bond in March 2019 for $1,200. The fact that you were able to sell your bond for $200 more than you paid for it means interest rates must have increased from March 2018 to March 2019. Indicate whether the last statement is TRUE or FALSE; and then provide support for your answer.

6. (8 points – parts A, B, C, and D) Assume you invest your money in a portfolio of stocks known as the S&P 500 (i.e. a portfolio of 500 stocks). Consider three different investment horizons (i.e. periods of time that you own the stock portfolio): (1) year, (5) years, and (20) years. For each part below, choose the investment horizon that answers the question. Write 1 year, 5 years, or 20 years in the space below the question.

6A. (2 points) Based on historical performance, in which investment horizon would you have earned the largest annualized gain (i.e. percentage gain per year or years)?

6B. (2 points) Based on historical performance, in which investment horizon would you have earned the lowest annualized gain (i.e. percentage gain per year or years)?

6C. (2 points) Based on historical performance, in which investment horizon would you have experienced the smallest annualized loss (i.e. percentage loss per year or years)?

6D. (2 points) Based on historical performance, in which investment horizon would you have experienced the largest annualized loss (i.e. percentage loss per year or years)?

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ECON121 Homework Problem Set #2 – Spring 2018

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7. (8 points) The actual or real world money multiplier is generally less than the simple money multiplier. Indicate whether the statement is TRUE or FALSE; and then provide support for your answer.

8. (6 points) Which of the following is not a component of the M1 money supply?

A. Demand deposits (i.e. checking accounts).

B. Large denomination Federal Reserve Notes (e.g., $100 bills).

C. Coins.

D. Outstanding balances on credit cards.

E. Answer choices A→D are all components of M1

9. (6 points) The term open market operations refers to the

A. loan-making activities by banks with households and businesses.

B. banks borrowing money from each other.

C. the buying and selling of U.S Treasury securities by the U.S. Treasury Department.

D. none of the answer choices A→C are correct.

10. (6 points) A bank finds itself short of required reserves and decides to borrow from the Federal Reserve. The interest rate on this loan is called:

A. the real interest rate.

B. the discount rate.

C. the federal funds rate.

D. the nominal interest rate.

11. (8 points) An Open Market Operations purchase will likely lead to an increase in aggregate demand. Indicate whether the statement is TRUE or FALSE; and then provide support for your answer.

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ECON121 Homework Problem Set #2 – Spring 2018

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12. (8 points) Assume a minimum reserve requirement of 6 ¼%. Also assume there is an Open Market Operations purchase of U.S. Treasury securities in the amount of $1,000,000. The seller of the U.S. Treasury securities deposits the $1,000,000 into her account at Chase. By what dollar amount could the money supply potentially grow as a result of this Open Market Operations purchase? Show your work.

13. (8 points) By increasing the minimum reserve requirement, the Federal Reserve increases the value of the simple money multiplier. Indicate whether the statement is TRUE or FALSE; and then provide support for your answer.

14. (8 points) A consumer deposits of $1,000 in currency into her checking account. The bank sets aside $200 aside as required reserves (i.e. assume a 20% minimum reserve requirement), and then makes a loan of $800 to a new borrower. This set of transactions increases the money supply by $1,800. Indicate whether the last statement is TRUE or FALSE; and then provide support for your answer.