1. (24 points) Suppose the adult population of Latium is 700,000. Of these 700,000 adults, 520,000 have jobs and 38,000 do not have jobs but are looking for work. Show your work on the questions below.
2. What is the labor force of Latium?
3. What is the labor force participation rate of Latium?
4. What is the unemployment rate of Latium?
5. If 2,000 of the unemployed workers in Latium become frustrated and stop looking for work, what is the new unemployment rate?
6. If 5000 workers in Latium lose their jobs but immediately begin looking for work, what is the new labor force participation rate?

2.(10 points) Antonius, Julius and Monica are all workers in Latium, but all are currently unemployed. In each case, briefly explain what type of unemployment the worker is experiencing and whether they are likely to be unemployed (in their field) long-term or short-term.

1. Antonius is a tutor to the children of wealthy families and finds himself out of work due a recession in the Latium economy.
2. Julius is a shipwright who lost his job when Latium opened trade with a nearby nation, Carthage. The ship builders of Latium have all recently moved their operations to Carthage where materials are cheaper.
3. Monica is a physician, originally from Carthage, who has recently arrived in Latium. She is still settling in her new city and has yet to find a job.

3.(20) Banking and the Money Supply.

1. Suppose the Fed buys 3 treasury bonds from the public.The people who sold these bonds keep all their money in a checking accounts. Each bond is worth $1000 (so the Fed has bought $3000 worth of bonds).Suppose further that the required reserve ratio is 0.12. Assuming no money is held as cash and that banks hold no excess reserves, by how much will this transaction eventually increase the money supply? Show your work.
2. Historically, the Fed used open market transactions as a tool of monetary policy. The Fed buys treasury securities from banks, or sells securities to them, in order to change bank reserves. What interest rate, specifically, are they expecting the change by doing this and how would it impact the economy? In general, what is the Fed's motivation for making these transactions?[1]
3. Since the 'Great Recession' of 2008, open market transactions are not an effective monetary policy tool in the U.S. - why not?Hint: check out this graph:https://fred.stlouisfed.org/series/TOTRESNS . Note that reserves are measured in billions so the most recent figure is over $3.3 trillion.
4. Currently the Fed pays interest to banks on the reserves they hold at the Fed. If the Fed wants to raise interest rates throughout the economy, should they raise or lower the interest rate they pay to banks on reserves held at the Fed?Why?

4.(12 points) You are a bank regulator working for the Federal Reserve. It is your job to see whether banks are solvent or insolvent, liquid or illiquid.Find the net worth of each bank below and fit them into one of the following four categories. Briefly explain your answers.

1. Liquid and Solvent (best).
2. Illiquid and solvent (probably needs short-term loans from other banks or from the Fed).
3. Liquid but insolvent (should be shut down immediately; could fool people for a while if not for your good efforts).
4. Illiquid and insolvent (should be shut down immediately)

Bank of DelMarVa
Short-term Assets	Short-term Liabilities
$10 million	$6 million
Total Assets	Total Liabilities
$40 million	$50 million

Bank of Escondido
Short-term Assets	Short-term Liabilities
$6 million	$10 million
Total Assets	Total Liabilities
$50 million	$40 million

Bank of Previa
Short-term Assets	Short-term Liabilities
$12 million	$10 million
Total Assets	Total Liabilities
$50 million	$40 million

Bank of Cambria
Short-term Assets	Short-term Liabilities
$8 million	$10 million
Total Assets	Total Liabilities
$30 million	$40 million

Bank of Marshall
Short-term Assets	Short-term Liabilities
$120 million	$100 million
Total Assets	Total Liabilities
$500 million	$400 million

5.(16 points) Suppose that this year's money supply is $500 billion, nominal GDP is $10 trillion, and real GDP is $5 trillion.

1. What is the price level? What is the velocity of money?
2. Suppose that velocity is constant and the economy's output of goods and services rises by 5 percent each year. What will happen to nominal GDP and the price level next year if the Fed keeps the money supply constant?
3. What money supply should the Fed set next year if it wants to keep the price level stable if real GDP rises by 5%.
4. What money supply should the Fed set next year if it wants inflation of 10 percent and real GDP rises by 5%

6. (12 points) If the tax rate is 40 percent, compute the before-tax real interest rate and the after-tax real interest rate in each of the following cases.

1. The nominal interest rate is 10 percent, and the inflation rate is 5 percent.
2. The nominal rate is 6 percent, and the inflation rate is 5 percent.

The nominal interest rate is 4 percent, and the inflation rate is 1 percent

[1] I mean, what reason do they give for this?Many people are skeptical of the Fed's motivations, and there are some popular conspiracies about it, but let's stick to the official reasons for the sake of this assignment.