Question

1) Securities are ______ for the person who buys them, but are ______ for the individual or firm that issues them.

A) assets; liabilities B) liabilities; assets C) negotiable; nonnegotiable D) nonnegotiable; negotiable

Part II: Short Answer/Problems—Answer all numbered questions @ 10 points each.

Provide your answers in the space provided or the back of the page. Make sure to scan all work pages.

Any quantitative questions require showing your work for full credit.

Round all $ problems to the nearest cent.

All other calculations must be to at least the fifth decimal place.

1) Specifically state what should happen to M1 and M2 (increase, decrease, no change) due to each of the following events.

Consider each lettered event to be independent of the others.

a) You take the $2,500 out of the shoebox in your closet and use it to pay off your car loan with the bank.

b) Higher market interest rates cause the public to move $125b from their checking accounts to their money

   market deposit accounts.

c) Decreased default risk causes banks to have a net increase in their lending of $325b this year.

d) The Federal Reserve purchases $22b in U.S. Treasury instruments from commercial banks.

e) An individual in the United States receives $25,000 cash (in $100 bills) from a Mexican drug lord for

   successfully transporting illegal drugs across the border from Mexico to the United States. She

   deposits the cash into her savings account.

2) Given the following 4 scenarios:

• The contract interest rate was 3.5% and the expected inflation rate was 1.5%.
• The contract interest rate was 5% and the expected inflation rate was 2%.
• The contract interest rate was 7.5% and the expected inflation rate was 4%.
• The contract interest rate was 9% and the expected inflation rate was 5%.

and an ex post actual inflation rate of 4.75%, answer both of the following questions.

   a) Indicate which scenario was expected to be best for the borrower and explain why it is best for the borrower.

   b) Indicate which scenario would have been best for society and explain why it is best for society.

3) Answer each if the following questions:

a) If nominal GDP in 1996 was $8,100.2 billion, and 1996 real GDP in 2009 chained dollars was $10,561.0 billion,

the 1996 GDP deflator index value was:

   b) If real GDP grows from $10,561.0 billion in 1996 to $11,034.9 billion in 1997, the growth rate for real GDP was:

   c) If the CPI is 156.9 in 1996 and 238.8 in 2016, then between 1996 and 2016, prices have increased by:

   (note: 1982-84 = 100)

4) Explain how the continued evolution of money has increased economic efficiency.

Part III: Longer Problems—Answer all numbered questions @ 15 points each.

Provide your answers in the space provided or the back of the page. Make sure to scan all work pages.

Any quantitative questions require showing your work for full credit.

Round all $ problems to the nearest cent.

All other calculations must be to at least the fifth decimal place.

1) The following table contains the CPI and the Federal Minimum hourly wage rates. (Show work for credit)

YEAR Hourly Min. wage CPI

1945 $0.40 18

1955 0.75 26.8

1965 1.25 31.5

1975 2.10 53.8

1985 3.35 107.6

1995 4.25 152.4

2005 5.15 195.3

2015 7.25 233.8

2018 252.0

1. Convert each nominal minimum wage into bae year dollars and rank them (by year) from lowest to highest real wage.

2. Determine how much the current minimum wage must be to equal the purchasing power of the highest real minimum wage on the list.

c. Determine how much the current minimum wage must be to equal the purchasing power of the lowest real

   minimum wage on the list.

2) Using the following information for the region of New England:

Nominal GDP Real GDP Population Year

(millions) (millions 2005 $’s)

491,139 623,792 13,642,253 1997

799,219 830,455 14,279,291 2007

1,021,856 883,228 14,810,068 2017

1. What is the average annual growth rate for New England’s economy for the time periods listed?
2. What is the average annual inflation rate for New England for the time periods listed?
3. To what extent are living standards likely changing in this economy? Support your claim using evidence from the above table. Compare the time periods and comment on any changes.

Answer 1

(1) (A)

Securities are assets for the security-holders but liabilities for the security-issuers, since issuers need to pay back the amount that holds invested in the securities.

(Part II - Question 1)

M1 = Cash & currency with public + Checkable deposits + Demand deposits + Travelers checks + Other checkable deposits

M2 = M1 + Time deposit + Savings deposit + Individual money market deposits

Therefore,

(a) Repaying loan from cash held will decrease M1 and decrease M2, both by $2,500.

(b) Movement from checking account to money market account will decrease M1 by $125B. But M2 will remain unchanged.

(c) Increase in bank loans will increase cash with public. Both M1 and M2 will increase by $325B.

(d) Fed's purchase of $22B will increase cash with public. Both M1 and M2 will increase by $22B.

(e) Increase in savings account will keep M1 unchanged. But M2 will increase by $25,000.

NOTE: As per Answering Policy, 1st 2 questions are answered.