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the Keynesian or the Monetarist school of thought? Why? What position
would the opposing school of thought take on this issue? (Be brief -- you
can answer this in 2 or 3 brief paragraphs).
(b.) (10 points) Any change in the economy’s total expenditures would
be expected to translate into a change in GDP that was larger than the
initial change in spending. This phenomenon is known as the multiplier
effect. Explain how the multiplier effect works.
(c.) (15 points) You are told that 90 cents out of every extra dollar
pumped into the economy goes toward consumption (as opposed to
saving). Estimate the GDP impact of a positive change in government
spending that equals $20 billion.
8.
Question :
(TCO G)
(a.) (20 points) Third National Bank is fully loaned up with reserves of
$20,000 and demand deposits equal to $100,000. The reserve ratio is
20%. Households deposit $5,000 in currency into the bank. How much
excess reserves does the bank now have, and what is the maximum
amount of new money that can be created in the banking system as a
result of this deposit? Show all work.
(b.) (20 points) What is the discount rate in the banking system? Explain
how the Fed manipulates this rate to achieve macroeconomic objectives.
9.
Question :
(TCO E and I) Let the exchange rate be defined as the number of dollars
per British pound. Assume there is a decrease in U.S. interest rates
relative to that of Britain.
(a.) (10 points) Would this event cause the demand for the dollar to
increase or decrease relative to the demand for the pound? Why?