Instructions: Multiple Choice Questions: Each of the multiple choice questions or incomplete statements below is followed by suggested answers or completions. Select the one that is best in each case.
Free Response Questions: Respond to the questions in the text boxes provided. In answering questions, you should emphasize the line of reasoning that generated your results; it is not enough to list the results of your analysis. Include correctly labeled diagrams, if useful or required, in explaining your answers. A correctly labeled diagram must have all axes and curves clearly labeled and must show directional changes. Clearly label each part of the answer. Only text that is included in the text boxes will be scored. Diagrams, if required, should be sent to your instructor via e-mail or fax.
Question 1 (Worth 15 points)
Suppose productivity in Happyland increases. Using a correctly labeled loanable funds graph, show and explain how the increase in productivity will affect the loanable funds market in Happyland. a. Explain how the change in interest rates will affect each of the following. i. capital investment
ii. Long-term economic growth
b. Explain how the change in interest rates will affect the international value of Happyland’s dollar.
a. i. Capital investment will increase because companies will want to invest because there will be an increased expected return on the investment.
ii. Interest rates are lower, so there will be more capital investment, thus more productivity.
b. The dollar will decrease because the interest rates have decreased and foreign investors will not want to invest in Happyland because they would receive a lower return.
For some reason I did not receive your graphs. It is easier to score the assessment when your graphs are with the explanation in case there are consistency points I can award. When you send them, I will score the question and add in the points. Mrs. Miller Points earned on this question: 0
Question 2 (Worth 15 points)
U.S. Government Bonds
Assume the balance sheet above is for Eastlandia National Bank. The reserve requirement is 20%.
a. Given the current situation, how much money can Eastlandia National Bank lend to borrowers if it wants to keep all of its bonds? b. Based on your answer in part (a), how much additional money can Eastlandia National Bank create? (Remember, how means how and why.) c. Explain two reasons why the money supply may not increase by the amount you identified in part (b).
a. $34,000. 20% (the reserve requirement) of the demand deposits, $180,000, is $36,000. This amount added to the bonds that want to be kept becomes $146,000. This sum subtracted from the demand deposits is $34,000, the amount the national bank can lend to borrowers by keeping all of its bonds.
b. $170,000. The money multiplier is 1/the reserve requirement, 0.2 which is 5. Then the money multiplier is multiplied by the excess reserves.
c. People do not put all of their money that they were loaned back into the bank, and the bank doesn't return all of the money they can-- some is kept in excess reserves.
Your answer to this free response question is excellent. You do have one error in the answer that I need to explain. You were awarded consistency points where applicable. (b) To find this answer, multiply the money multiplier times the answer you found in (a) as this is how much additional can be created. You must show your work. Points earned on this question: 14
Question 3 (Worth 2 points)
If the future value of money is less than the expected revenue generated, the loan is more attractive for investors.
will provide less return on investment.
is more attractive for lenders.
will eventually pay for itself.
is less attractive for...
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