Suppose you are about to graduate from college and your Uncle Rob makes you an offer. He will give you $475 today or he will give you $600 a year from today. Assume no inflation or taxes.

1.Compute the present value of $600 received in a year if the interest rate is 20%. Show your work. Which option provides you with the largest monetary gift?

2.Assume that interest rates decrease. Will the present value of $600 received in a year increase, decrease, or remain unchanged? Explain.

3.Explain the Federal Funds Rate.

4.Suppose the Fed wants to lower the Federal Funds Rate. What open-market operation would it use?

5.Assume that the open-market operation that you indicated in problem 4 is equal to $20 million. If the required reserve ratio is 0.1, calculate the maximum change in loans throughout the banking system.

6.Identify the effect of the open-market operation in problem 4 on the nominal interest rate.

7.Suppose that the Fed's action results in an increase in the price level. What would be the impact of the open-market operation on the real interest rate? Explain.

Jalen Smithers deposits $4,000 of his cash holdings in his checking account at Springfield Federal Bank. The reserve requirement is 25 percent and the bank has no excess reserves.

8What is the initial effect of Jalen's deposit on the money supply? Explain.

9Calculate the change in excess reserves that Springfield Federal can initially loan out.

10.Calculate the maximum increase in the money supply that the entire banking system can create.

11.Identify one reason why the money supply may not increase by the amount you identified in problem 10.