Unit 4:

Part 1: Nominal v. Real Interest Rates: Answer the questions. Show your work.

1. Assume the nominal interest rate is 7% and inflation is 3%. What is the real interest rate?

2. Assume the real interest rate is -2% and the inflation rate is 5%. What is the nominal interest rate?

3. Assume the real interest rate is 4% and the nominal interest rate is 7%. What is the expected rate of inflation?

Unit 4: Part 1: Nominal v. Real Interest Rates: Answer the questions. Show your work. 1. Assume the nominal interest rate is 7% and inflation is 3%. What is the real interest rate? 2. Assume the real interest rate is -2% and the inflation rate is 5%. What is the nominal interest rate? 3. Assume the real interest rate is 4% and the nominal interest rate is 7%. What is the expected rate of inflation?WW: Use the balance sheet below to answer the questions. Required reserves $2,000 Demand deposits $20,000 Excess reserves $0 Customer loans $7,000 Government securities (bonds) ? 4. Calculate the total amount of government securities this bank owns. 5. Calculate the required reserve ratio. Explain how you got your answer. 6. Suppose that an individual deposits $10,000 of cash into her checking account. What is the immediate effect of the cash deposit on the M1 measure of the money supply? Explain. 7. What is the dollar value of the bank's required reserves after the $10,000 cash deposit? Explain. 8. What is the dollar value of the bank's excess reserves immediately after the $10,000 cash deposit? Explain. 9. Calculate the maximum increase in the money supply as a result of the $10,000 deposit. Show your work. 10. Calculate the maximum increase in the money supply when the govemment buys $10,000 of securities. Show your work. Part 3 - Monetary Policy: Fill out the chart showing how each influences the economy. Negative Output Gap Positive Output Gap AS or AD shift? Long-Run Self-Adjustment 2 Fiscal Policy Actions 3 Monetary Policy Actions 11. How does a decrease in the interest rate affect investment? Explain