ECONOMICS 5050 -- Third Homework Assignment

DUE: May 16, 2005

PART I (50 points)

1. What is the Federal Reserve and what are its goals?

2. What are the major tools of monetary policy and how do they work?

3. What is meant by the “Phillip’s Curve”? Why might it slope down? Why might it not?

4. What is meant by a monetary rule and why would someone like Milton Friedman advocate following a monetary rule?

5. Compare and contrast Keynesianism with monetarism.

PART II (10 points)

1. Based on the following information and assuming a required reserve ratio of 10%. If the Fed bought $60 of government securities from Bob’s Pretty Good Bank and considering the maximum amount the bank could lend what’s the maximum expansion of the money supply?

Bob’s Pretty Good Bank
Assets		Liabilities
Total Reserves	200	Demand Deposits	600
Loans	300	Capital	400
Government Securities	200
Property	300

2. Suppose the banking system has $500,000 in total demand deposits, and $50,000 in actual reserves. The reserve ratio is 5 percent. How much new money can the system create?

PART III (40 points)

1. What is the “Principle of Comparative Advantage”?

2.  Suppose the production possibilities for the Utopia and Nirvana are:

	Utopia Output Combinations Possible				Nirvana Output Combinations Possible
Goods	A	B	C	D	A	B	C	D
Milk (gallons)	18	12	6	0	3	2	1	0
Cookies  (lbs)	0	2	4	6	0	5	10	15

A) What is the opportunity cost of a pound of cookies in Utopia ?

B) What is the opportunity cost of a pound of cookies in Nirvana?

C) Which country has the comparative advantage in cookies?

D) Which country has the comparative advantage in milk?

3. Compare and contrast tariffs and quotas.

4. Briefly discuss some of the goals of multinational trade organizations and give some examples of such organizations that exist today.

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