Key to Test 2 Study Problems

I hope you're enjoying working on the study problems. Be aware that these problems may not cover all the material we covered in class (e.g., Fisher equation and correcting interest rates for inflation) but you ought to prepare for everything and anything. Also, as mentioned in class, the GDP deflator is discussed in Ch. 10. (See pp. 213-214.)

If you have any questions or you think any of these answers are wrong please contact me.

1-B, 2-B, 3-C, 4-A, 5-A, 6-C, 7-A, 8-B,

9-B, 10-D, 11-D, 12-B, 13-A, 14-D, 15-A,

16-C, 17-C, 18-D, 19-C, 20-A, 21-C, 22-A,

23-D, 24-A, 25-B, 26-B, 27-B, 28-D, 29-D,

30-C, 31-C, 32-B

Short answer problems:

1. A. Money is different from other assets in the economy because it is the most liquid asset available. Other assets vary widely in their liquidity.

B. Commodity money is money with intrinsic value, like gold, which can be used for purposes other than as a medium of exchange. Fiat money is money without intrinsic value; it has no value other than its use as a medium of exchange. Our economy today uses fiat money.

2. A. If the required reserve ratio is 5 percent, then First National Bank's required reserves are $500,000 x .05 = $25,000. Since the bank’s total reserves are $100,000, it has excess reserves of $75,000.

B. Assets side will change to: $25,000 reserves and $475,000 loans. There is no change on the liabilities side.

C. With a required reserve ratio of 5 percent, the money multiplier is 1/.05 = 20. If First National lends out its excess reserves of $75,000, the money supply will eventually increase by $75,000 x 20 = $1,500,000.

3. If the Fed purchases $100,000 in government securities from the public, this will wind up in the banking system. Assuming banks only hold required reserves and the required reserve ratio is 8%, the money supply could grow to $100,000 x (1/.08) = $1,250,000.

4. Labor Force = 6,021,000 + 138,547,000 = 144,568,000

To find Labor Force Participation rate you need the working age population:

Working Age Population = Labor Force + Not in Labor Force

= 144,568,000 + 67,723,000

= 212,291,000

So LFP rate = 144,568,000 ÷ 212,291,000 =0.6809 or 68.1%

Unemployment rate = 6,021,000 ÷ 144,568,000 = 0.0416 or about 4.16%

5. A. Figure 3 illustrates the effect of a union being established in one labor market. When one labor market is unionized, shown in the figure on the left, the wage rises from w₁^U to w₂^U and the quantity of labor demanded declines from U₁ to U₂^D. Since the wage is higher, the quantity supplied of labor increases to U₂^S, so there are U₂^S - U₂^D unemployed workers in the unionized sector. The quantity of labor employed in this market is inefficient, since more workers would like to have jobs at the existing wage.

B. When those workers who become unemployed in the union sector seek employment in the nonunionized market, shown in the figure on the right, the supply of labor shifts to the right from S₁ to S₂. The result is a decline in the wage in the nonunionized sector from w₁^N to w₂^N and an increase in employment in the nonunionized sector from N₁ to N₂.

There really is an image below. If it doesn't show up the space ought to. You can left-click to load image. (Or for you mac users, merely click and hold.)