ECO205/ PRINCIPLES OF MACROECONOMICS/ Q3 (12-13)

Quach Thanh Vinh 1132300391

Huynh Quoc Vinh 11323003

Problem Set 3
Question 1: (30 points, 3 points each)
A. Read the following description of each person, and determine if each person is
unemployed, unemployed, or not in the labor force, according to the BLS
definitions. Explain.
1. Johns company puts 50 people on a temporary furlough (temporarily laid off) and has
promised to recall them to work next month. In the mean time, he has been working at
home making scarves that he sells at the flea market.
In this case John is unemployed because he is not working at this time and
he is waiting for recall for the job. Although he has been working at home
making scarves, his products are not enter in a legal market in order to be
considered a self-employed. ( Flea market is an illegal market)
2. Tom worked for the ABC Manufacturing Company for six years until he was laid off
when the firm closed his factory. He registered for unemployment compensation, and he
has been sending out resumes and is competing applications each week since that time.
Is Tom employed or unemployed?
Tom is unemployed because now he is not employed if he not available
and looking for a job he will be called not in the labor forces. But he was
available for work since he was laid off and he also had tried to find a job
so he is called unemployed.
3.

Susan has been out of work for over four months. She has had no luck finding a
new job because the businesses in her town are all reducing their employment. She has
become so frustrated that she has not even looked for a job for the past month.
Susan is not in the labor force because although she unemployed she did
not want to find a job, she is not available for a job so she cannot classify
as employed or unemployed. A person can be called unemployed if he/she
out of work and looking for a job. If not he/she cannot be called
unemployed.

4. Lisa works as a volunteer twenty hours a week for a church food pantry without being
paid. She previously worked at an insurance company until she was laid off. At this
time, she is not looking for another job.
Lisa is not in the labor because she does not have a job now and she is not
looking for a job as well.
5. Nick is fifteen and has dropped out of school. He is looking for a job so that he can
move out of his parent's house and live on his own. Someday, he wants to be an
electrician, but his school did not have a vocational program.

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Nick is not in the labor force because he just fifteen he is not old enough
to be called an adult and to be counted as a part of the labor force. He has
only been adult when he is 18 years old.

B. Multiple Choice Questions

1. Assume a very small economy comprised of the following people, all of whom are
civilians, 16 years and older. A is happily employed. B does not have work, but is
actively sending out his resume to employers. After several months of an unsuccessful
job search, C has stopped looking and entered a job retraining program to become a
nurse. D has just graduated from college and is starting his job search. E has left her job
to care for her newborn child. The labor force participation rate in this economy would
be:
a. 60%
5 = 100%
3 = x% => x= (3 * 100%)/ 5
b. 50%
c. 40%
d. 30%
2. Suppose the population is 300 million. There are 146 million employed, and 7.2
million unemployed. Then the unemployment rate is:
a. 2.4%
b. 4.7% = 2.7/ ( 2.7 + 146)
c. 4.9%
d. 5.3%
3. Suppose the population is 300 million. There are 146 million employed, and 7.2
million unemployed. Suppose that 1 million of the 7.2 million unemployed become so
discouraged that they drop out of the labor force. The unemployment rate is:
a. 2.1%
Unemployed= 7.2 1 = 6.2
b. 2.4%
Unemployment rate = 6.2 / (6.2 + 146)
c. 4.1%
d. 4.7%
4. Jack lost his job during the last recession. What type of unemployment is he
experiencing?
a. Frictional unemployment
b. Structural unemployment
c. Natural unemployment
d. Cyclical unemployment
5. Minimum-wage laws, labor unions and efficiency wages are the three explanations for:
a. Cyclical unemployment
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b. Natural unemployment
c. Frictional unemployment
d. Structural unemployment

Question 2: (20 points, 4 points each)

1. What is included in M1, the simplest definition of money? (4pts)
M1 is used as a measurement to quantify the amount of money in circulation. The
M1 is a very liquid measure of the money supply,cash and assets in there can
quickly be converted to currency. M1 includes all physical denominations of coins
and currency, demand deposits, which are checking accounts Negotiable Order of
Withdrawal (NOW), and travelers' checks.
Money is a good that acts as a medium of exchange in transactions in order to
helping people buy goods and services. Classically it is said that money acts as a
unit of account, a store of value, and a medium of exchange.
2. Suppose that the T-account for XYZ Bank is as follows:
(Moffatt, n.d.)
XYZ BANK
Assets
Reserves
Loans
Total

$100,000
$ 500,000
$600,000

Liabilities
Deposits
Total

$600,000
$600,000

a. If the FED requires banks to hold 10% of deposits as reserves, how much in
excess reserves does XYZ now hold? (4pts)
We have R = 10% => Reserves = 10% x 600,000 = $ 60,000
The excess reserves = $ 100,000 - $ 60,000 = $ 40,000
b. If XYZ decides to hold only the required reserves amount, correct changes in the
above T-account :
Reserve = $60,000
Loans = $600,000 - $60,000 = $ 540,000

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XYZ BANK
Assets
Reserves
Loans
Total

$ 60,000
$ 540,000
$ 600,000

Liabilities
Deposits
Total

$600,000
$600,000

c. What is the numerical value of the money multiplier, based on this example:
We have R= 10% => Money multiplier = 1/R = 10.
$60,000 of reserves creates $ 600,000 money.
d. Assume all other banks hold only the required amount of reserves. When XYZ
holds the amount of reserves mentioned in part c:
New loans is $ 100,000 - $ 60,000 = $ 40,000
The nations money supply increases = money multiplier x $ 40,000
= 10 x $ 40,000
= $ 400,000
Question 3: (20 points)
How many options the Fed can choose to increase the money supply? What are
they? Explain how each works.
There are three ways that the FED can choose to increase money supply.
Buying government bonds: When FED buys bonds from
government, the amount of money FED pay for bonds will
increase the number of dollars in the economy. This number of
dollars can be kept as currency or deposit.
Reducing the reserve requirement: Reserve is the amount of money
the bank has received but has not loaned out, the reserve
requirement is the legally imposed minimum amount of reserve
that banks must hold against their deposit. When RR is lower, it
means the bank hold less reserves and makes more loans. Then,
reducing the reserve ratio lead to an increase in money multiplier
and the money supply also. As a result, there is more money in the
economy.
Lower the discount rate can also increase the money supply
because when the discount rate is lower, banks are more willing to
borrow money from the FED. Therefore, the quantity of reserve
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and money supply increase. As a result, more and more money
circulates in the economy.
How can the effectiveness of these policies be limited by the actions of banks and the
public?
The FED is not perfectly controlling the money supply because of two main
reasons:
Fed does not control the amount of money that households choose to hold

as deposits in banks. It is quite easy to recognize that some people want to

put their money in a bank and gain some interest while the others want to
keep as their cash at home. As a result, the amount of money in the banks
is not predictable and controllable. For example, when households deposit
more money in the banks, there will be more reserve in the banks.
Consequently, they are able to create more money. Otherwise, there will
be less money in the economy.
Fed does not control the amount of money bankers choose to lend because
banks are legally to choose the RR that they believe is good for them
regardless the RR of FED. For example, when the FED keeps 15% of
deposit as their RR, there are not any problems if banks want to keep 20%
as their RR.

Question 4: (20 points, 5 points each)

Consider the money supply-demand diagram we learnt in class, with the quantity of
money on the horizontal axis, the value of money on the left vertical axis and the
price level on the right vertical axis.
1. Suppose first that real GDP rises and that, as a result, the consumers & firms who are
buying more goods & services want to hold more money at any given level of prices. In
the diagram, will the money demand curve be shifted to the left or to the right?

The money demand curve be shifted to the right.

2. As a result of this shift in the money demand curve, will the price level rise, fall or stay
the same?

The price level fall.

3. Now, suppose instead that the money demand curve remains unchanged, but the
Federal Reserve conducts an open-market operation to increase the money supply. In the
diagram, will the money supply curve be shifted to the left or to the right?

The money supply curve be shifted to the right.

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4. As a result of this shift in the money supply curve, will the value of money rise, fall or
stay the same?

The value of money will fall.

Question 5: (10 points, 2 points each)

1. Fiat money, such as the dollar bills we use nowadays:
A.
Is backed by gold.
B.
Has no intrinsic value at all.
C.
Is based on the amount of precious metals held by the government.
D.
Is printed and introduced into the economy by the Treasury of the US

2. Which of the following occurs when the Fed reduces the reserve requirement?
a.
The money multiplier gets bigger.
b.
Banks become more reluctant to lend.
c.
The amount of money in the economy is reduced.
d.
Interest rates tend to rise in the economy.
3. Liquidity refers to
a. The ease with which an asset is converted to the medium of exchange.
b. How many time a dollar circulates in a given year.
c. The suitability of an asset to serve as a store of value.
d. A measurement of the intrinsic value of commodity money.
4. Rapid and persistent inflation occurs mainly due to:
a.
high wage increases demanded by labor unions.
b.
greedy firms that abuse consumers with higher-than-necessary prices.
c.
rapid increases in the quantity of money in the economy.
d.
trade with other countries.
5. If the interest rate is below equilibrium in the Money Market, people will choose to
________ their interest bearing accounts in banks, causing the interest rate in the
economy to ________.
a.
Deposit some money into, increase
b.
Deposit some money into, decrease
c.
Withdraw some money from, increase
d.
Withdraw some money from, decrease

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References:
Gregory Mankiw, N. (2012). Production and Growth. In M. G. N, Principles of
Economics (6th Ed.). (pp. 633-635). OH 45040 USA: Cengage Learning.
Moffatt, M. (n.d.). About.com Guide. Retrieved from
http://economics.about.com/cs/studentresources/f/money.htm

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