December 2020

What does it mean to say that banks “create money”? Give the formula for the simple deposit multiplier. If the required reserve ratio is 20 percent, what is the maximum increase in checking account deposits that will result from an increase in bank reserves of $20,000? Is this maximum increase likely to occur? Briefly explain.

An article in The Economist noted that the capital controls imposed on Greece in 2015 were due to the fact that a bank run was to be prevented by all means. Why is itimportant to prevent massive withdrawals from bank accounts? Briefly explain why deposit insurance plays such a crucial role in financial markets and economic stability.

An article in the Wall Street Journal has the headline “Don’t Look Now, but Market Inflation Expectations Are Falling.” If inflation turns out to be lower than households and firms had previously expected, will the actual real wage end up being higher or lower than the expected real wage? Will employment in the short run end up

“If there are problems with markets, government will generally be able to intervene and correct the situation.” Is this statement true? Explain your response. “The political process sometimes leads to economic in efficiency because we elect the wrong people to political office. If the right people were elected, a democracy governed by majority rule would

What is rent-seeking? When is it likely to be widespread? How does it influence economic efficiency? Explain. “The average person is more likely to make a well-informed choice when purchasing a personal computer than when voting for a congressional candidate.” Is this statement true? Why or why not?

“When an economic function is turned over to the government, social cooperation replaces personal self-interest.” Is this statement true? Why or why not? What is the short-sightedness effect? How does it influence the attractiveness of government borrowing? Explain.

If a bond pays $1,000 per year in perpetuity (each year in the future), what will the market price of the bond be when the long-term interest rate is 10 percent? What would it be if the interest rate were 5 percent? How are bond prices related to interest rates? Why are they related?

How is a nation’s trade balance related to its net inflow of foreign capital? If a nation is running a trade deficit, is this bad? Why or why not? The following chart indicates the aggregate demand (AD) and short-run aggregate supply (SRAS) schedules of decision-makers for the current period. Both buyers and sellers previously anticipated

What impact would a change that shifts an economy’s production possibilities curve outward have on the long-run aggregate supply curve? How have improvements in computer technology affected production possibilities and the long-run aggregate supply curve? Explain.

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