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ECON 202_online
Homework #3
50 points
1) Suppose you go to the Lansing mall on West Saginaw Highway to shop for clothes, bed-
ding, video games, etc.
What would be more convenient for you to spend: money under M1 or money under M2?
Answer: (circle the correct answer) (2
points)
M1 M2 Either, both are equally convenient

2) Suppose Leo Messi deposits $3,500 cash in the Humongous National Bank.
Suppose, the required reserve ratio in this economy is 12%.

a) Fill out the blanks in the Humongous National Bank’s T-account to reflect this
transaction. Assume that Humongous National did not have any previous deposits.
Show your calculations.
Answer: (3
points)
Humongous National’s T-account:
Assets Liabilities__
TR= 3,500 Total Deposits D = 3,500
RR = 420 (12% * 3,500 = 420)
ER = 3,080 (3,500 – 420 = 3,080)

b) As a result of Leo Messi’s deposit, what is the maximum amount (in $) that
Humongous National can loan out?
Answer: (1
point)
$3,080

c) Now, suppose that Humongous National loans the amount that you found in
part b) to Ronaldinho Gaúcho.
Fill out the blanks in the Humongous National Bank’s T-account to reflect this
transaction. Show your calculations.
Answer: (3
points)
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Humongous National’s T-account:

Assets Liabilities__
TR= 420 D = 3,500
RR = 420
ER = 420

d) As a result of this transaction, can Humongous National continue loaning out

money using Leo Messi’s initial deposit of $3,500?
Answer: (circle the correct answer) (1 point)

YES NO

e) Now, suppose that Ronaldinho Gaúcho deposits a loan from Humongous

National Bank in the Financial National Bank. The required reserve ratio in this
economy is still 12%. Assume that Financial National did not have any previous
deposits.
Fill out the blanks in the Financial National Bank’s T-account to reflect this
transaction. Show your calculation.
Answer: (3
points)
Financial National’s T-account:
Assets Liabilities__
TR= 3,080 D = 3,080
RR = 369.60
ER = 2,710.40

f) As a result of Ronaldinho’s transaction, what is the maximum amount that

Financial National can loan out?
Answer: (1
point)
$2,710.40

g) Now, suppose that Financial National loans $1,500 to Gianluigi Buffon.

Fill out the blanks in the Financial National Bank’s T-account to reflect this
transaction. Show your calculation.
Answer: (3
points)
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Financial National’s T-account:

Assets Liabilities__
TR= $369.40 D = $3,080
RR = $369.40
ER = $2,710.40

h) As a result of this transaction, can Financial National continue loaning out

money using Ronaldinho’s initial deposit?
Answer: (circle the correct answer) (1 point)

YES NO

i) Suppose Financial National and Humongous National are the only 2 commercial
banks in the economy. The required reserve ratio is 12%.
Calculate by how much money supply in this economy can go up as a result of Leo
Messi’s initial deposit of $3,500.
Show ALL STEPS of your calculations and the unit of account.
Answer

(5 points)
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3) Fill in 7 blanks in the following table and interpret your results. Show your
calculations and units of account.
Year Real GDP Consumptio Saving, $ Marginal Marginal
(National n, $ Propensity Propensity
Income), $ to Consume to Save
2015 9,000 8,000 1,000 --------- ---------
2016 10,000 8,600 1,400 0.6 0.4
2017 12,000 9,300 2,700 0.35 0.65
a) Calculations: (7
points)

b) Fill in the blanks using your answers in part a):

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Answer: (3 points)
In 2016, out of each $1 of additional income (real GDP) a country
spent____$0.6________, while saved the rest_____$0.4________.

c) Fill in the blanks using your answers in parts a) and b):

Answer: (3 points)
If in 2016 this country’s real national income went up by $3,800, the consumption
spending went up by _____60_____%, which is equivalent to $_____2,280_______.

4) Refer to the graph below to answer the following questions.

a) Which area, curve or label shows the long-run macroeconomic equilibrium?

Answer: (2 points)
Point “A” shows the long-run macroeconomic equilibrium. Long-run
equilibrium is where AD, SRAS, and LRAS meet.

b) Which area, curve or label shows the potential real output?

Answer: (2 points)
The point “Y1” shows the potential real output.

c) Which area, curve or label shows the full-employment real GDP?

Answer: (2 points)
Point “Y1” shows the full-employment real GDP.

d) Which area, curve or label shows the actual real GDP?

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Answer: (2 points)

Point “Y2” shows the actual real GDP

e) Which area, curve or label shows the country’s “desirable” (full-employment)
price level?
Answer: (2 points)
The “desirable” price level in the economy is “P1”.

f) Which area, curve or label shows the country’s actual price level?
Answer: (2 points)
Point “P2” shows the actual price level

g) Which curve reflects the fact that there has been a negative supply shock?
Answer: (2 points)
The shift in the SRAS curve from SRAR1 to SRAS2, decrease in the
output from Y1 to Y2 both shows the fall in output because of the negative
supply shock.