Suppose that on January 1 the exchange rate between the U.S. dollar and the European Union euro was $1.40 to buy one euro

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255 Paper 3
Answer the following:
1. ​<strong>Suppose</strong> <strong>that</strong> on January 1 the exchange rate between the U.S. dollar and the European
Union euro was $1.40 to buy one euro. On December 31 of <strong>that</strong> year, a person needed
$1.45 to buy one euro. Over the course of <strong>that</strong> year, did the dollar appreciate or depreciate
against the euro? Did the change in the exchange rate make it easier or more difficult for
American college students to spend a semester at a European university?
Explain.
2. ​What will happen to the money supply if Jamie withdraws $400 from her checking account and
the required reserve ratio is 5%?
3. ​How does a nation's saving rate, as measured by the marginal propensity to save, affect the
size of the spending multiplier? Explain with both intuition and the formula for the multiplier.

4. ​What is meant by the term “social insurance”. Give an example of a social insurance program.
5. ​What is the goal of expansionary monetary policy and how does it work in the short run?
6. ​Most economists do not support a law <strong>that</strong> requires the federal budget to be balanced every
year. Explain why.
7. ​Explain the difference between fiscal and monetary policy.