I. Multiple Choice Section (30 points).

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IV. Graphs (15 points) Use a separate diagram to answer each question. Label all axes, indicate initial equilibrium and show the direction of a change. Label the final state of the economy. If necessary, provide a short description for each graph. 1. Show the effect of the higher government expenditure on the current account of an open economy. 2. Show the effect of the higher reserve requirement on the interest rate in the economy. 3. Show the effect of the higher minimum wage on the number of unemployed workers in the economy. - 6 -
V. Essay (15 points) The Fed is concerned with rising unemployment in the economy and is trying to design measures to mitigate economic slowdown. a. Briefly describe what policies the Fed can implement to achieve this target. b. Choose one of the policies, you suggested in the previous question, and track its effect on the financial system, given that the initial state of the Fed and commercial banks is described as: (Use the same steps as in the problem set) Reserve Requirement 10% Federal Reserve Balance Sheet Balance Sheet of Commercial Banks Assets Liabilities Assets Liabilities Securities 300 Currency 250 Reserves 50 Dem. Dep. 500 Reserves 50 Loans 450 Total 300 Total 300 Total 500 Total 500 Policy description: Instrument Chosen: Size of the Instrument: (i) Immediate Change Federal Reserve Balance Sheet Balance Sheet of Commercial Banks Assets Liabilities Assets Liabilities Securities Currency Reserves Dem. Dep. Reserves Loans Total Total Total Total (ii) Final Adjustment Federal Reserve Balance Sheet Balance Sheet of Commercial Banks Assets Liabilities Assets Liabilities Securities Currency Reserves Dem. Dep. Reserves Loans Total Total Total Total - 7 -
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I. Multiple Choice Section (30 points).

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