Question 1

After a report by newspapers that savings was at an all time low, households begin to save more for retirement.

a. Using a correctly labeled loanable funds graph, show and explain how the change in savings will impact real interest rates in the United States in the short-run.

b. Assume the nominal interest rate is currently at 8% and there is no expected inflation. If the government announced a 3% expected inflation rate, determine the value of each of the following:

1. new nominal interest rate
2. new real interest rate

c. Explain how the change in real interest rates identified in part (a) would affect investment spending by businesses.

Question 2

Assume Chobot First National Bank is fully loaned up and that the reserve requirement is 20%. Mikey deposits $1,000 into the bank.

a. Calculate the impact of this deposit on the M1 measure of the money supply. (Calculate means show your work.)

b. Explain two limitations of the money creation process.

c. Suppose the reserve requirement is lowered to 10% instead of 20%. Explain how the reduction in the reserve requirement affects the total money supply and how much money the bank can create using the new reserve requirement, if Mikey deposits $1,000 into the bank.

(Round all calculations to two decimal places, if not whole number.)