University

of the Philippines
SCHOOL OF ECONOMICS

Economics 100.1: Introduction to Macroeconomic Theory and Policy

Common Problem Set No. 3
Ch. 22 Business Cycles and Aggregate Demand
Ch. 23 Money and the Financial System

R. Reside J. P. Corpuz | J. E. Lazatin | P. M. Medrano | A. G. Santos

INSTRUCTION: Submit to your TFs on Thursday, October 22, 2015, before lecture class.


1. Use the Keynesian cross to predict the impact of
a. An increase in government purchases.
b. An increase in taxes.
c. An equal increase in government purchases and taxes.

2. In the Keynesian cross, assume that the consumption function is given by C = 200 + 0.75 (Y T).
Planned investment is 100; government purchases is 100; and taxes is 100.
a. Graph planned expenditure as a function of income.
b. What is the equilibrium level of income?
c. If government purchases increase to 125, what is the new equilibrium level of income?
d. What level of government purchases is needed to achieve an income of 1,600?

3. The "value" of money:
A) is based upon its value as a commodity.
B) is based upon the value of the precious metals that back it.
C) is based upon its acceptance and determined by its supply.
D) is based upon its convenience.
E) none of the above.

4. If the Central Bank requires that banks retain 15% of all deposits as reserves, a bank that receives
$100,000 in deposits can loan up to:
A) $30,000.
B) $85,000.
C) $115,000.
D) $185,000.
E) none of the above.

5. Assuming a 15% reserve ratio, an increase in deposits of $300,000 could eventually result in:
A) a $2 million increase in the money supply.
B) a $345,000 increase in the money supply.
C) a $45,000 increase in the money supply.
D) a $1.5 million increase in the money supply.
E) there would be no change in the money supply.

6. The fundamental explanation of why commercial banks can create money lies in:
A) fractional reserves.
B) the Central Bank.
C) private ownership.
D) the consumption function.
E) maintaining a marginal propensity to consume less than 1.
1a,c. upward AD
1b. downward AD
2b. 1300
2c. 1400
2d. 175

C, B, A, A
7. Required reserve ratios:
A) exist primarily to ensure that deposits are safe.
B) exist to penalize banks that are members of the Central Bank System.
C) exist primarily to help the Central Bank control the money supply.
D) exist for all of the above reasons.
E) exist for none of the above reasons.

8. The Central Bank may not be able to accurately predict the growth in deposits caused by an increase
in high-powered money if:
A) excess reserves are sometimes wanted and sometimes unwanted.
B) output drops below full employment.
C) consumers alter the velocity of their money holdings.
D) any or all of the above.
E) none of the above.

9. Speculative bubbles occur when:
A) the economy is stuck in a disequilibrium position.
B) the economy is at equilibrium at a level of output less than potential GDP.
C) stock prices rise because people think they will rise further in the future.
D) investment in equities increases because of recent increases in corporate profits.
E) financial capital moves rapidly from one sector of the economy to another.

10. Which of the following refers to the process by which monetary policy undertaken by the central
bank interacts with banks and the rest of the economy to determine interest rates, financial
conditions, aggregate demand, output, and inflation?
A) bank transmissions.
B) fund supervision.
C) monetary transmission mechanism.
D) market control.
E) none of the above.

C, A, C, C
True/False Questions

11. Speculative bubbles always produce crashes.

12. The riskiness of an investment is measured by the standard deviation of the returns on the
investment.

13. Paper money is "fiat" money.

14. If banks held 100 percent reserves against deposits, there would be no net change in the money
supply when currency was withdrawn from these banks by the public.

15. The primary function of legal reserve ratios is to maintain bank liquidity.

16. Government-dictated money is "fiat" money.

17. There is no limit to the amount of money that the banking system can create through the multiple
expansion of bank deposits.

18. Two assumptions are made with the money-supply multiplier: that all money remains in checking
accounts, and that no banks retain excess reserves.

19. The cost of holding money is the interest forgone from not holding other assets.

20. If the reserve requirement were 100%, then the money multiplier would equal 0.

T, T, T, F, F
T, T, T, T, F