Question One (1)

If the reserve requirement for banks in an economy is 10 percent, how much money could be created with the deposit of an additional $5,000 into a deposit account?

Question Two (2)

Assume that the quantity equation of exchange, M x V = P x Y, holds in an economy. Assume further that the money supply is $5,000, real output is 10,000 units, and the price per unit of output is $5.

1. Determine the velocity of money circulation.
2. Using the value for the velocity of money circulation from part (a), determine the change in price if money supply increases to $6000.

Question Three (3)

In an economy, the tax rate is 25% and the marginal propensity to spend is 85%.

1. Determine the value of the fiscal multiplier.
2. If the government increases its spending by $20 billion, by how much will the total income and spending increase?

Question Four (4)

Suppose there are only two countries, U.S. and U. K. The following table reports the output per worker per hour in each country.

	Wheat (bushels/hour)	Cloth (yards/hour)
U.S.	6	4
U.K.	1	2

1. Which country has an absolute advantage in each of the commodity? Explain.
2. Which country has a comparative advantage in each of the commodity? Explain.

Question Five (5)

Suppose a small country manufactures 2,000,000 smartphones per year. However, the domestic demand for smartphones is 3,500,000 per year. The world price for a smartphones is $600. The small country will import the 1,500,000 smartphones from the world market at free trade prices. If the government of the small country decides to impose a tariff of 10 percent on imported smartphones, the price of the imported smartphone will increase to $660. Domestic production after the imposition of the tariff increases to 2,500,000, while the quantity demanded declines to 3,000,000.

1. Calculate the loss in consumer surplus arising from the imposition of the tariff.
2. Calculate the gain in producer surplus arising from the imposition of the tariff.
3. Calculate the change in government revenue arising from the imposition of the tariff.
4. Calculate the deadweight loss arising from the imposition of the tariff.