Question

11. (4 points) Assume that the currency-deposit ratio is 0.2. The Federal Reserve carries out open-market operations, purchasing $1 million worth of bonds from banks. This action increased the money supply by $2 million. Suppose this economy has $10 million of total reserves after the open market operations. (1) The money multiplier is (2) The reserve-deposit ratio is (3) The amount of currency after the open market operation is $_ (4) The amount of money supply after the open market operation is $_ million. million. 12. (1 point) Company A sells apple juice, using apples it buys from another firm for $20 thousand. It pays its workers $35 thousand, pays $1 thousand in taxes, and has profits of $3 thousand. Company A's contribution to GDP is thousand. 13. (3 points) Consider a labor market in the medium run equilibrium. The production function is assumed to be Y=N. Let z represent all other factors that affect the wage determination. If the equilibrium real wage increases from 0.75 to 0.8, then the mark-up will change from to , holding a constant. This will also (increase/decrease) the natural rate of unemployment in the equilibrium.

Answer 1

Solution:11)

Money multiplies: 2

Reserve-deposit ratio: 0.4

Amount of currency after the open market operation: $5 million

Amount of money supply after the open market operation: $30 million

　

Working:

Money multiplier = 2

　

Money multiplier = (currency/deposit+1)/ (currency/deposit + reserve ratio)

2 = (0.2 + 1) / (0.2+rr)

2* (0.2+rr) = 1.2

0.2+rr = 1.2 /2

rr = 0.6 - 0.2 = 0.4

Total deposit: Reserve / reserve ratio = 10 / 0.4 =25.

Currency = (Deposit * currency-deposit ratio) = 25 * 0.2 = 5

Money supply = Currency + Deposit = 30

Solution-12) $ 39 thousand

Working: Product approach: [(20+35+1+3)-20]= 39; Income approach: [35+1+3]= 39

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