Group Exercise 2

Instructions: This is a group exercise. Your team is responsible for preparing the answers to
the following 4 sets of questions. You are not allowed to compare or share your answers with
other teams. The Hult policy on plagiarism applies to your work done in this exercise.
Your answers should be typed and all graphs should be drawn using any appropriate software.
Please list the name of your cohort, and the names of all team members. Submit your work via
myCourses document submission (one document per team) no later than Sunday night,
November 20th, 11:59 PM, EST.

1. Explain how each of the following events affects the monetary base, the M1 money
supply, and the M2 money supply of these respective countries (ignore the multiplier).
a) In the U.S., the Federal Reserve Bank buys US Treasury bonds in the open
market.
b) The Chinese Central Bank raises the required reserves ratio for domestic
commercial banks.
c) The European Central Bank (ECB) decreases the discount rate and banks in the
Euro-Zone respond by borrowing from the ECB.
d) The Russian Central Bank sells foreign currency (international) reserves from
commercial banks against in an effort to increase the value of the Ruble, the
Russian currency.
e) In Switzerland, individual savers react to the increase in domestic interest rates.

2. From 2007 to 20011 the U.S. monetary base increased by 200 percent, but M1 and M2
increased by 40 percent and 25 percent respectively. What do you think caused this
explosion in the monetary base? Why do you think M1 and M2 did not increase by the
same percentage as the monetary base?
3. The United States federal budget deficit is expected to continue to decrease during the
2015 fiscal year.
Using a graph and written explanations for all your answers, and keeping everything else
equal, describe the effect of this fall in the deficit on the real loanable funds market:
a) What will happen, if anything, to the demand for real loanable funds? Why?
b) What will happen, if anything, to the supply of real loanable funds? Why?
c) What will happen to the equilibrium real risk-free interest rate?
4. Using a supply and demand graph as well as written explanations, explain what would
happen to the demand, supply, and the equilibrium Real Risk-Free Interest rate (RRFR)
in the domestic real loanable funds (credit) market for each of the following scenarios:
a. USA: Due to bright economic conditions, US consumers feel more confident
about the future.
b. Colombia: Due to higher domestic interest rates, foreigners invest massively in
Colombian government bonds (issued in Colombian Pesos).
c. Venezuela: Individuals convert their domestic savings into US dollars.
d. Canada: To boost domestic spending, the Canadian government imposes a 5% tax
on all checking and near-money deposits.