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Macroeconomics review questions: Monetary & Fiscal Policy

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1. Determine whether each of the following is counted in the M1 measure of the money supply:

i. The coins in your piggy bank.
ii. The funds in your checking account at First National Bank.
iii. The funds in your savings account at Second National Bank.
iv. The traveler's check you have left over from your trip to Germany.
v. The available balance on your Citico Gold MasterCard.

2. Refer to the simplified balance sheet for a bank and answer the following questions.

Assets Liabilities
Reserves $10,000 Deposits $70,000
Loans $66,000 Stockholder's equity $6,000

a. If the required reserve ratio is 5 percent, how much in excess reserves does this bank hold?
b. What is the maximum amount this bank can expand its loans?
c. What will happen to the M1 money supply if it makes the loans in (b) above and those funds are deposited into another bank by the borrowers? 

3. Assume the interest rate on a Treasury bill is 2 percent and will pay its owner $1,000 when it matures in one year.

i. What is the price of the Treasury bill in today's market?
ii. Suppose that the Fed engages in open market sales which results in the interest rate on new one-year Treasury bills rising to 3 percent. What will happen to the price of these existing Treasury bills with rates of 2 percent? Why?

4. Identify each of the following events as:

a) part of an expansionary fiscal policy
b) part of a contractionary fiscal policy
c) or not part of fiscal policy

i. The corporate income tax rate is increased.
ii. Defense spending is increased.
iii. Families are allowed to deduct all daycare expenses from their federal income taxes.
iv. The individual income tax rate is decreased.
v. The State of New York builds a new highway.

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Solution Summary

This solution gives detailed answers to 4 questions commonly found on Macroeconomics exams. The topics covered are:

1. Measuring the money supply
2. Excess reserves and making new loans
3. Present value of a Treasury bill
4. Expansionary and contractionary fiscal policy

Solution Preview

1. Cash, checking accounts and travellers' checks are counted in M1.
i. Yes
ii. Yes
iii. No
iv. Yes
v. No

2.
a. The bank's total deposits and equity are $76,000, of which it must keep 5%, or $3800, in reserves. Its actual reserves are $10,000, so its excess reserves are (10000 - 3800 =) $6200.

b. With $6200 in excess reserves and an ...

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