Test Preparation

Here is the key to the multiple choice problems on the review handout. Let me know if you think there are any errors.
1-D, 2-A, 3-B, 4-B, 5-B, 6-D, 7-D, 8-C, 9-C, 10-B, 11-B, 12-D, 13- A,
14-D, 15-C, 16-B, 17-A, 18-C, 19-B, 20-C, 21-B, 22-D, 23-B

Here is the answer to Problem 4 from class on Wednesday. (Mankiw, p. 248, problem 13)

a. If people hold all money as currency, the quantity of money is $2,000.

b. If people hold all money as demand deposits at banks with 100 percent reserves, the quantity of money is $2,000.

c. If people have $1,000 in currency and $1,000 in demand deposits, the quantity of money is $2,000.

d. If banks have a reserve ratio of 10 percent, the money multiplier is 1/.10 = 10. So if people hold all money as demand deposits, the quantity of money is 10 x $2,000 = $20,000.

e. (This is the fun but tricky one. Don't expect a problem this difficult on the test.) If people hold equal amounts of currency (C) and demand deposits (D) and the money multiplier for reserves is 10, then two equations must be satisfied:
(1) C = D, so that people have equal amounts of currency and demand deposits; and (2) 10 x ($2,000 - C) = D, so that the money multiplier (10) times the number of dollar bills that are not being held by people ($2,000 - C) equals the amount of demand deposits (D). Using the first equation in the second gives 10 x ($2,000 - D) = D, or $20,000 - 10 D = D, or $20,000 = 11 D, so D = $1,818.18. Then C = $1,818.18. The quantity of money is C + D = $3,636.36.

More comments on Homework #3

Here are a few things to think about.

Problem 6. Use the market for loanable funds. The first figure is on p. 276. The supply curve is "Savings" and the demand curve is "Investment". In this problem there are two things going on. Figure how how each affect either investment demand or savings supply. Be sure to discuss how the equilibrium changes. Also, remember: when supply and demand both change, one of the variables (price or quantity) changes clearly, the other uncertain.

Problem 2. Part A is a typical price floor. Make note of what happens to the number of workers hired under this price floor. This directly impacts the "non-union" market in B. The non-union market has wages set at equilibrium. You should see how this equilibrium changes because of what happens in the union market. (Hint: If people are unemployed in the union market, where do they look for jobs?)

Problem 5. See your notes or the discussion primarily on p. 273. Hint: What did we call (T - G)? Figure that out then you can figure out G and then C.

Cuba and the Dollar

Here's an interesting story about the use of the U.S. dollar in Cuba.

http://abcnews.go.com/Business/story?id=235885&page=1

Comments on Problem Set #3

Problem 3. Your answer should include discussion of a "production function" and a "productivity function". This was discussed more thoroughly in class than it is in the book.

Problem 4. Make sure you read the section "Investment from Abroad" pp. 251-253.

FOMC Meeting

It looks like the meeting of the Federal Open Market Committee is Wednesday, Nov. 10, rather than Tuesday. Their meetings are usually on Tuesdays. I'm not sure why this one is scheduled for Wednesday. Check this link for their calendar. http://www.federalreserve.gov/fomc/#calendars

Meaningless typos

Homework problem 5 is found on page 285 and problem 6 is on page 286. Editing error on my part. These are both Chapter 13. Sorry for the confusion (but certainly you should assume what I had typed out dominates what I reference).