Exercise 1 (25 points)

Assume the government increases taxes by $2.3 million,

1. Calculate the tax multiplier in the 3 scenarios below. Show ALL you work (10 points)

1. By how much will aggregate demand decrease by in the 3 scenarios below? Show ALL you work (10 points)

Scenario 1: MPC = 0.6 and MPS = 0.4

Scenario 2: MPC = 0.5 and MPS = 0.5

Scenario 3: MPC = 0.2 and MPS = 0.8

1. What do you conclude? (5 points)

Exercise 2 (25 points)

Assume the government decreases spending by 1.5 million,

1. Calculate the government spending multiplier in the 3 scenarios below. Show ALL you work (10 points)
2. By how much will aggregate demand decrease by in the 3 scenarios below? Show ALL you work (10 points)

Scenario 1: MPC = 0.75 and MPS = 0.25

Scenario 2: MPC = 0.5 and MPS = 0.5

Scenario 3: MPC = 0.25 and MPS = 0.75

1. What do you conclude? (5 points)

Exercise 3(30 points)

Assume that excess reserves = $5,000. Loans = $8,000. Treasury bonds = $6,500. Demand deposits = $19,000 and Required reserves = $1,900.

1. Provide a T account(5 points)
2. Calculate owner's equity(5 points)
3. Calculate the reserve requirement ratio (RRR)(5 points)

If Sam deposits $2,350 in this bank.

1. Provide a new T account(5 points)
2. Calculate the new RRR. How much is the new excess reserve? What does this number represent? (5 points)
3. What is the change in total money supply? (5 points)