Economics 102
L. Stone
Spring 2003
Quiz 9
1. The Fed decides to use a expansionary monetary policy.
a. Buy bonds or lower reserve requirements
or lower the discount rate (Note that “lower interest rates” is not a complete
answer, because either the Fed is lowering the discount rate or it’s buying
bonds to lower the federal funds rate)
b. On the graphs below, carefully show the
effects of this policy on the economy. Briefly explain in words or
symbols below. (10 points)
Graphs must correspond with the following
explanation and be correctly labeled.
Money supply increases which causes
interest rates to fall which cause the quantity of investment to increase which
causes C + I + G to increase, and thus output increases.
c. Carefully explain how your answer would be
different in an open economy. (7 points)
In an open economy, the decrease in the
interest rate makes U.S. bonds LESS attractive to overseas savers.(2) Thus the
demand for dollars (NOT the demand for money) decreases (1), and the dollar
depreciates. (1) The depreciation of the dollar causes the price of U.S. goods
to fall relative to foreign goods (1), and thus U.S. exports increase, and U.S.
imports decrease. (1) C + I + G + (X-M) increases further due to the rise in
net exports, and thus Y falls further. (2) Monetary policy is more effective in
an open economy.
(It is ok if it just says something like,
less attractive to save in US, value of $ falls, net exports rise, output rises
further)
2. For each of the following examples, find the change in the monetary base, the change in bank deposits (after all rounds of expansion or contraction are completed) and the change in the money supply. The reserve requirement is 5%. (6 points)
a. The Fed sells $50,000 worth of government bonds to banks.
Change in deposits = -1,000,000
Change in money supply = -1,000,000
b. You deposit $3,000 in your checking account.
Change in deposits = 60,000
Change in money supply = 57,000