ECON 50 – Principles of Economics

Professor Serkan Ozbeklik

ASSIGNMENT 6 – ANSWERS

1) Suppose some country had an adult population of about 46.5 million, the labor-force participation rate was 63.5
percent, and the unemployment rate was 5.8 percent. What were the number of people employed and the
number of people unemployed?
a. about 29.5 million and 2.7 million.
b. about 29.5 million and 1.7 million.
c. about 27.8 million and 2.7 million.
d. about 27.8 million and 1.7 million.
2) Between 2004 and 2005, the country of Aquilonia reported an increase in the number of people who were
employed. It also reported an increase in the unemployment rate. Which of the following would best explain
the two reports?
a. There was an increase in the size of the labor force between 2004 and 2005.
b. There was a decrease in the size of the labor force between 2004 and 2005.
c. There was an increase in the size of the adult population between 2004 and 2005.
d. The two reports are contradictory and can't be reconciled.
3) Suppose that in the economy in general efficiency wages become more common. Economists would predict that
this would
a. increase the quantity demanded and decrease the quantity supplied of labor thereby decreasing the natural
rate of unemployment.
b. decrease the quantity demanded and increase the quantity supplied of labor thereby increasing the
natural rate of unemployment.
c. increase the quantity demanded and decrease the quantity supplied of labor thereby increasing the natural
rate of unemployment.
d. decrease the quantity demanded and increase the quantity supplied of labor thereby decreasing the natural
rate of unemployment.
4) If the minimum wage were currently above the equilibrium wage, than a decrease in the minimum wage would
a. increase both the quantity demanded and the quantity supplied of labor.
b. decrease both the quantity demanded and the quantity supplied of labor.
c. increase the quantity of labor demanded and decrease the quantity supplied.
d. decrease the quantity of labor demanded and increase the quantity supplied.
5) Consider two labor markets in which jobs are equally attractive in all respects other than the wage rate. All
workers are equally able to do either job. Initially, both labor markets are perfectly competitive. If a union
organizes workers in one of the markets, then the wage rates will tend to
a. rise in both markets.
b. fall in both markets
c. rise for the union jobs, but remain unchanged for the nonunion jobs.
d. rise for the union jobs and fall for the nonunion jobs.
6) Suppose the banking system currently has $300 billion in reserves, that the reserve requirement is 10%, and that
$3 billion of the reserves are excess reserves that will not be lent out. What is the value of deposits?
a. $3,300 billion
b. $2,970 billion
c. $2,700 billion
d. $2,673 billion
7) Suppose the Fed requires banks to hold 10% of their deposits as reserves. A bank has $20,000 of excess reserves
and then sells the Fed a Treasury bill for $9,000. How much does this bank now have to lend out if it decides
to hold only required reserves?
a. $29,000
b. $28,100
c. $19,100
d. $11,000

1
ECON 50 – Principles of Economics
Professor Serkan Ozbeklik

Balance Sheet of The Peoples' Bank of Madison, WI.

Assets Liabilities

Reserves $25 million Deposits $265 million

Loans $240 million

8) Refer to Table above. Suppose that all other banks are meeting their reserve requirements and that people
hold only deposits and no currency. Assume that Peoples' Bank has a rule to hold no excess reserves and a
rule to not relend loan repayments until the 10% reserve requirements is met. When it has met the reserve
requirement, reserves have changed so that the money supply should have
a. increased by over $10 million
b. increased by less than $10 million
c. decreased by less than $10 million
d. decreased by more than $10 million

Meditorian Banking Statistics

The monetary policy of Meditor is determined by the Meditorian Central Bank. The local currency is the medit.
Meditorian banks collectively hold 100 million medits of required reserves, 25 million medits of excess reserves,
250 million medits of Meditorian Treasury Bonds, and their customers hold 1,000 million medits of deposits.
Meditorians prefer to use only demand deposits and so all currency is on deposit at the bank.
9) Refer to Meditorian Banking Statistics. Assuming the only other thing Meditorian banks have on their
balance sheets is loans, what is the value of existing loans made by Meditorian banks?
a. 625 million medits
b. 875 million medits
c. 1,125 million medits
d. None of the above is correct.
10) Refer to Meditorian Banking Statistics. Suppose that the Central Bank of Meditor loaned the banks of
Meditor 5 million medits. Suppose also that both the required reserve ratio and the percentage of deposits
held as excess reserves stay the same. By how much would the money supply of Meditor change?
a. 60 million medits
b. 50 million medits
c. 40 million medits
d. None of the above is correct.
11) Meredith recently graduated from college but has not yet started working. To be counted as unemployed she
a. does not have to have looked for work.
b. must have looked for work no more than a week ago.
c. must have looked for work no more than 4 weeks ago.
d. must have looked for work no more than 12 weeks ago.

2
ECON 50 – Principles of Economics
Professor Serkan Ozbeklik

12) Some people who are employed or who are not making serious effort to find employment will report themselves
as unemployed. Some people who want to find work will be counted as out of the labor force.

a. Both the first and the second fact tend to make the reported unemployment rate lower than
otherwise.
b. Both the first and the second fact tend to make the reported unemployment rate higher than
otherwise.
c. The first fact tends to make the reported unemployment rate higher than otherwise, while the
second fact tends to make the reported unemployment rate lower than otherwise.
d. The first fact tends to make the reported unemployment rate lower than otherwise, while the second
fact tends to make the reported unemployment rate higher than otherwise.
13) If the federal funds rate were above the level the Federal Reserve had targeted, the Fed could move the rate
back towards its target by

a. buying bonds. This buying would reduce reserves.

b. buying bonds. This buying would increase reserves.
c. selling bonds. This selling would reduce reserves.
d. selling bonds. This selling would increase reserves.
14) The economy of Mainland uses gold as its money. If the government discovers a large reserve of gold on their
land

a. the supply of money decreases and the value of money rises.

b. the supply of money increases and the value of money falls.
c. the demand for money increases and the value of money rises.
d. the demand for money decreases and the value of money falls.
15) As the price level decreases, the value of money

a. increases, so people want to hold more of it.

b. increases, so people want to hold less of it.
c. decreases, so people want to hold more of it.
d. decreases, so people want to hold less of it.

16) Open-market purchases by the Fed make the money supply

a. increase, which makes the value of money increase.
b. increase, which makes the value of money decrease.
c. decrease, which makes the value of money decrease.
d. decrease, which makes the value of money increase.
17) The price level rises if either

a. money demand shifts rightward or money supply shifts leftward; this rise in the price level is
associated with a rise in the value of money.
b. money demand shifts rightward or money supply shifts leftward; this rise in the price level is
associated with a fall in the value of money.
c. money demand shifts leftward or money supply shifts rightward; this rise in the price level is
associated with a rise in the value of money.
d. money demand shifts leftward or money supply shifts rightward; this rise in the price level is
associated with a fall in the value of money.

3
ECON 50 – Principles of Economics
Professor Serkan Ozbeklik

On the graph, MS represents the money supply and MD represents money demand. The usual quantities are
measured along the axes.
Value of Money

MS MS
1 2

0.5

0.33
MD

10,000 15,000
Quantity of Money

18) Refer to Figure above. Which of the following events could explain a shift of the money-supply curve from
MS1 to MS2?

a. an increase in the value of money

b. a decrease in the price level
c. an open-market purchase of bonds by the Federal Reserve
d. None of the above is correct.
19) Refer to Figure above. At the end of 2009 the relevant money-supply curve was the one labeled MS1. At the
end of 2010 the relevant money-supply curve was the one labeled MS2. Assuming the economy is always in
equilibrium, what was the economy’s approximate inflation rate for 2010?

a. -33 percent
b. 17 percent
c. 50 percent
d. 67 percent

4
ECON 50 – Principles of Economics
Professor Serkan Ozbeklik

20) In December 1999 people feared that there might be computer problems at banks as the century changed.
Consequently, people wanted to hold relatively more in currency and relatively less in deposits. In anticipation
banks raised their reserve ratios to have enough cash on hand to meet depositors' demands. These actions by
the public

a. would increase the multiplier. If the Fed wanted to offset the effect of this on the size of the money supply, it
could have sold bonds.
b. would increase the multiplier. If the Fed wanted to offset the effect of this on the size of the money supply,
it could have bought bonds.
c. would reduce the multiplier. If the Fed wanted to offset the effect of this on the size of the money supply, it
could have sold bonds.
d. would reduce the multiplier. If the Fed wanted to offset the effect of this on the size of the money
supply, it could have bought bonds.

Short Answer Questions

1) The table below uses data for the year 2003 provided by the BLS and adjusted
to be comparable to U.S. data. All values are in thousands. Fill in the blank
entries in the table. Show your work!

Labor-Force
Adult Labor Unemployment Participation
Country Population Force Employed Unemployed Rate Rate
Japan 109,474 62,510 3,500
France 26,870 2,577 57.41
Germany 70,159 39,591 9.69

Answer:

Labor-Force
Adult Labor Unemployment Participation
Country Population Force Employed Unemployed Rate Rate
Japan 109,474 66,010 62,510 3,500 5.30 60.30
France 46,804 26,870 24,293 2,577 9.59 57.41
Germany 70,159 39,591 35,755 3,836 9.69 56.43

5
ECON 50 – Principles of Economics
Professor Serkan Ozbeklik

2) Suppose that the T-Account for Bank of America is as follows:

Assets Liabilities
Reserves $100,000 Deposits $500,000
Loans $400,000

a. If the Fed requires banks to hold 10 percent of deposits as reserves, how

much in excess reserves does Bank of America now hold?
b. Assume that all other banks hold only the required amount of reserves. If
Bank of America decides to reduce its reserves to only the required amount,
by how much would the economy’s money supply increase?

Answer:

a. Bank of America’s reserve Ratio: $100,000/$500,000 = 0.2 (20 percent)

so the bank holds 10 percent, or $50,000, as excess reserves.
b. If Bank of America reduces its reserves to the required amount, it will loan
out its excess reserves so that extra $50,000 will enter the banking system.
Since all the other banks are holding only the required amount of reserves
(10 percent of their total deposits), this $50,000 will have potential to
became $500,000 (money multiplier = 1/0.10 = 10). Therefore, the total
money supply would potentially go up by $500,000 – $50,000= $450,000.