Econ 104 Macro
Problem Set #7
Answer Key
1. Contrast a financial asset to a real asset. A financial asset has value to the owner of the
asset based on the issuer of the asset meeting certain obligations. The obligation of the
issuer of the asset is called a financial liability. E.g., you borrow money from the bank
– the loan is a financial asset to the bank and a financial liability to you.
2. rr = 0.10, c = 0.5. complex money multiplier = (1+c)/(rr+c) = (1.5)/(0.6) = 2.5.
3. rr = 0.2 tells us that required reserves are 20% of deposits so that required reserves are
$200,000. The bank has actual reserves of $300,000, implying that the maximum
amount of new loans the bank can extend is $100,000. The bank lends a total of
$800,000.
4. The three policy tools of the Fed are reserve requirements, the discount rate, and open
market operations (OMOs). Make sure you can explain each of these and how they are
used to change the money supply (see class notes for details). OMOs are used most
frequently. If the Fed wants to decrease the quantity of money, it will conduct an Open
Market Sale, which means the Fed sells U.S. government securities in the open market.
5. Use the Fisher Equation: r = i – Π. If r increases by 1% and Π decreases by 2%, then i
must decrease by approximately 1%.
6. You don’t have to know this one.
When income is unpredictable, households may want to hold more money to deal with
this unpredictability. Both the precautionary and the transactions motives for holding
money may increase with unpredictable incomes. Therefore, in the money-market
diagram, Md shifts out, leading to an increase in the interest rate.
7. e
8. b
9. b
10. b
11. a – You don’t have to know this one.
12. c – You don’t have to know this one.