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Part A
Some economists have advocated replacing government deposit insurance with 100-percent reserve banking. Under this plan, banks would hold all deposits as reserves. Deposit insurance would no longer be necessary, because banks would always have the reserves to meet customer withdrawals.
a. What would happen to the money supply (defined as currency and bank deposits) in the transition from fractional reserve to 100-percent reserve, if this plan were implemented, holding other factors constant?
b. What will be the value of the money multiplier?
Part B The Federal Reserve has three tools to control the money supply: open-market operations, the discount rate, and reserve requirements.
a. How should each instrument be changed if the Fed wishes to decrease the money supply?
b. Will the change affect the monetary base and/or the money multiplier?
Which is the largest component of expenditure in a three sector model? Which component of aggregate expenditure is more volatile? Explain why?
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Suppose your wage rate is determined by WAGE = −19.68 + 2.52EDUC + 0.55EXPER − 0.007EXPER2 where EDUC is years of schooling and EXPER is years of work experience. Using calculus, what value of EXPER maximizes WAGE for a person with 16 years of educat..
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At the Central Furniture Company, customers who buy on credit pay an effective annual interest rate of 16.1%, based on monthly compounding, what is the nominal annual interest rate that they pay?
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IPS Corp. will upgrade its package-labeling machinery. It costs $150,000 to buy the machinery and have it installed. Operation and maintenance costs, which are $1500 per year for the first three years, increase by 500 per year for the machine's 10-ye..
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