quest 3

The price of Lucky Charms, a substitute for Fruit Loops, decreases. At the same time, wages fall for the workers at the Fruit Loops factory.

. As the price of a substitute decreases, the demand curve for Fruit loops will shift left and down. As wages fall for workers at the Fruit Loops factory the supply curve will shift down and right. This will cause prices to fall but the change in quantities will be indeterminate - as it depends on the size of the shifts.

This might make you think a little bit. Use what you know about supply and demand. Suppose that a supply curve is written as a line: 𝑃 =2𝑄𝑠 +3 where P is price and 𝑄𝑠 is quantity supplied. Likewise, the demand curve is 𝑃=−4𝑄𝑑 +9 where P is price and 𝑄𝑑 is quantity demanded. What are equilibrium prices and quantities? Show your work for partial credit.

Recall that in equilibrium quantity supplied and quantity demanded are the same. This means that you can replace them in the equations above with just Q. Then you have two equations and two unknowns. Solving will yield P = 5 and Q =1.

What is the money multiplier in this economy, and how much will the quantity of money change by? Use R/D and C/D from parts B and C.

Recall that mm = (1+C/D)/(C/D+R/D) = 1.2/.4 = 3. The change in the money supply will be 3 x 50000 = $150,000.

Explain why retirees are particularly adverse to inflation. Hint: They rely on fixed incomes.

Retirees have a fixed amount of money, which is nominal. As prices increase, or inflation occurs, the amount that a fixed income can buy decreases. This makes retirees worse off.

Name two ways that the Fed could have increased the money supply.

The Fed could increase the money supply through

Suppose the Fed wants to increase the money supply in hopes of eventually lowering interest rates. Should it buy or sell bonds? Explain.

The Fed should buy bonds from the banking sector. This will give the banks excess reserves which they can loan out to fuel the money creation process.

Suppose a bank decides to lend out $50,000. If the currency drain ratio is 20%, how

This requires you to solve two equations with two unknowns: C+D = 50000 and C/D = .2. Solving for C will yield $8,333.

Show what would happen if the Fed increase the money supply. How would interest rates be affected?

When the Fed increases the money supply, M would increase and P would stay fixed in the short run. This would increase M/P and shift the MS curve to the right. This would in turn push interest rates down as people sought to spend their excess money on bonds, driving their prices up and their returns (the interest rate) down.

Which of the following statements is not like the others? a. The output gap > 0. b. Real GDP = potential GDP. c. Cyclical unemployment = 0. d. The economy is operating at full employment.

a. The output gap > 0.

Over the last 10 years, tuition and college fees have grown faster than any other major category in the CPI. Education composes a much smaller part of the CPI basket for the typical urban household that it does for you, CPI inflation likely a. Understates the inflation that college students feel. b. Overstates the inflation that college students feel. c. Precisely estimates the inflation that college students feel. d. CPI inflation does not include changes in tuition, only core inflation does.

a. Understates the inflation that college students feel.

a. Draw and properly label the market for real money balances.

a. Your graph should have the nominal interest rate (or interest rate is fine) on the vertical axis and real money balances, M/P, on the horizontal axis. You should have a vertical money supply line and a downward sloping money demand line.

Suppose the Fed sells securities to the banking sector. This will shift the money supply curve will shift __________ and make the nominal interest rate will ______________. a. left; rise. b. left; fall. c. right; rise. d. right; fall.

a. left; rise.

If the basket of goods and services used to calculate the CPI cost $200 in the reference base period and $450 in a later year, the CPI for the latter year equals _________, and the inflation rate between the reference period and the current period is a. 450; 250%. b. 225; 125%. c. 200; 250% d. 325; 175%

b. 225; 125%.

The three types of unemployment are a. Voluntary, involuntary, and structural. b. Frictional, structural, and cyclical. c. Frictional, voluntary, and part-time. d. Part-time, involuntary, and cyclical.

b. Frictional, structural, and cyclical.

Suppose that you buy a home. During the term of the loan, inflation is greater than was expected when you signed it. Who is better off, you or your lender? Why?

b. If inflation is greater than expected you will be paying the bank back with dollars that have less real value (i.e. how much they can buy in real goods) than the bank expected. This would make you better off than expected.

The Quantity Theory of Money suggests that if real GDP is constant a. inflation will not occur. b. inflation will increase one-for-one with money growth. c. inflation will always be positive. d. inflation will always be negative.

b. inflation will increase one-for-one with money growth.

When real GDP is greater than potential GDP unemployment is a. greater than the natural rate. b. less than the natural rate. c. equal to the natural rate. d. More information is needed.

b. less than the natural rate.

Typically, the CPI overstates inflation by 1.1%. All of the following are sources of bias in the CPI a. New goods bias. b. Commodity substitution bias. c. Fixed-Price bias. d. Quality change bias. e. Outlets substitution bias.

c. Fixed-Price bias.

Suppose that a headline read "U.S. Economy loses 100,000 jobs; unemployment rate falls." Which of the following might explain the headline? a. Many new college graduates entered the workforce. b. Employment surveys double-counted some workers. c. Many unemployed workers stop looking for work. d. The headline must be a typo.

c. Many unemployed workers stop looking for work.

Suppose that in Tyler's bailiwick (fun word eh? Look it up) there are 100 million people. 25 million of these people are under the working age (there are no prisoners- they were sent to Australia). Because there is such a high standard of living in the bailiwick, there is a large retired population and many full-time college students (who only attend school), which together account for 50 million people. All in all, there are only 40 million employed people in the country. What is the unemployment rate? a. 66% b. 60% c. 20% d. 10% e. This simply cannot be.

e. this simply cannot be

Suppose a bank receives $50,000 from the Fed for some government bonds. If the required reserve ratio is 20%, how much new excess reserves does the bank have? Show your work.

hey have $50,000 in new excess reserves. The bank's deposits do not change, therefore their required reserves do not change.