DI C S I C + I G C+I+G XN TE

0 50 50 50 50

100 100 50 50 50

200 150 50 50 50

300 200 50 50 50

400 250 50 50 50

500 300 50 50 50

DI - disposable income, C - Consumption, S - Savings, I - Investment, G - Government Expenditure, XN - Net exports, and TE - Total Equilibrium. Please note that TE is also referred to as GDP or Income. So TE or Y = C + I + G + XN. Therefore if Disposable income (DI) is $0 and consumption, ( C ) is $50, how much is your saving (S)

1.Calculate S,C + I,C + I + G,C + I + G + XN for each level of disposable

income.

2.Calculate equilibrium using all sectors (TE).

3.What would the new equilibrium be if "I" was increased to 100 instead of 50?What would this mean to the economy?

Assume the reserve ratio is 10%

Formula:Potential Expansion Deposits = 1/Reserve Ratio x Excess Reserves

Note: ER is Excess reserves given by Total Reserves - Required Reserve

Required Reserves = Total Deposits x reserve ratio

County National Bank

A

L

Reserves20,000

100,000Deposits

ER = ______________________Potential Expansion _____________________

2.FED (Federal Reserve Bank). buys a $10,000 bond from bank.What is the potential impact on MS (Money Supply)?

3.FED. buys a $10,000 bond from bank customer.What is the impact on MS?

Is there a difference between 2 and 3?Why?

4.Assume money supply rule.Growth in Q is 5%; growth in V is 2%.How much should the MS grow to keep P constant? Assume MV = PQ (note: what should the value of M and P be to balance the equation MV = PQ)