BUSN 1008 Introductory Macroeconomics
1. Using the balance sheet below for a commercial bank explain how much if any this bank can expand its lending if the required reserve ratio is 20%.
2. Draw the demand and the supply for money and identify the equilibrium interest rate. Make sure to draw a money supply curve that is independent of the interest rate. Draw the curves so that the equilibrium interest rate is 8%. Explain why interest rates above or below 8% are not stable.
3. Explain with the use of a graph why the shape of the money demand curve makes a difference in terms of the effectiveness of monetary policy.
4. Use a graph to illustrate the effect an expansionary fiscal policy will have on the money market. What happens to the interest rate? What impact will this have on the effectiveness of fiscal policy?
5. Graphically illustrate the impact of a decrease and increase in the interest rate on aggregate expenditure. On your graph, illustrate the impact of an increase and decrease in the interest rate upon aggregate expenditure. Summarize the relationship among changes in the rate of interest (r), the change in planned investment spending (me), its impact on the aggregate expenditure function (AE), and the multiple effects on income (Y).
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