1. Let the reserve ratio (rr) = .1. Checking Accounts Deposits at the Fed Govern
ID: 1211434 • Letter: 1
Question
1. Let the reserve ratio (rr) = .1.
Checking Accounts Deposits at the Fed Government Bonds Loans
$100,000 $50,000 $20,000
$30,000
a. Construct an initial balance sheet.
b. Calculate the money multiplier and the change in the Ms. c. Construct a final balance sheet.
2. Assume that the economy is in a recession.
a. Show how fiscal policy would affect the goods market and the domestic and international currency markets.
b. Show how monetary policy would affect the domestic and international currency markets and the goods market.
1. Suppose that the current exchange rate of British pounds for $ is 2£ to 1$. Suppose that the rate was 2.5£ to 1$ last week.
Has the $ appreciated or depreciated with respect to pounds?
How much was a $30 pair of jeans in pounds last week? This week?
How much was a 40£ purse in $ last week? This week?
Dollar has depreciated because it takes fewer pounds to buy one.
It takes 60£to buy a pair of jeans this week, whereas last week it took 75£.
Therefore, our goods have become cheaper. They don't have to spend as many
pounds.
It takes $20 to buy the purse this week, whereas last week it took $16.
Therefore, their goods have become more expensive. We have to spend more
dollars.
2. Tell me what happens to equilibrium price and quantity in the market for $ in international trade when incomes in the US rise.
(Draw a S/D graph to illustrate.) If incomes here go up, we will buy more
imports. To buy imports, we need the other currency, so we will supply $. Therefore the supply of $ abroad goes up, the price goes down, and the quantity goes up.
Explanation / Answer
Dollar has depreciated because it takes fewer pounds to buy one. It takes 60£to buy a pair of jeans this week, whereas last week it took 75£. It takes $20 to buy the purse this week, whereas last week it took $16.
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