1. Explain the difference between saving and investment as defined by a macroeconomist. Which of the following situations represent investment? Saving? Explain.

a. Your family takes out a mortgage and buys a new house.

Investment, because households can rise or fall in price over time.

b. You use your $100 paycheck to buy stock in Apple.

Savings, because your using left over money and putting it somewhere you cannot spend it.

c. Your sister takes out $100 from her bank deposits and buys a bicycle to deliver newspaper.

Investment, because you are buying something in hopes of making money.

d. You borrow $100 from a bank to buy an old iPod.

Consumption, because you are just buying something for now use. Just recreational.

2. The Federal Reserve conducts a $10 million open-market purchase of government bonds. If the required reserve ratio is 10 percent, what is the largest possible increase in the money supply that could result? Explain. What is the smallest possible increase? Explain.

* The largest possible increase in the money supply is $100 million, because of the money times the money multiplier which is the money times 1 over the reserve ratio.

* The smallest possible increase in the money supply is $10 million, because if the banks would have never gave out money then the banks will start off with $10 million dollars.

3. Assume that the reserve requirement is 4 percent. By how much can the money supply expand if the Federal Reserve buys $2,000 worth of bonds assuming that the banks keep the minimum reserve and people do not hold any cash?

$50,000

4. If the tax rate is 40 percent, compute the before-tax real interest rate and the after-tax real interest rate in each of the following cases.

a. The nominal interest rate is 10 percent, and the inflation rate is 5 percent.

Before-tax real interest rate- 5%

After-tax real interest rate- 1%

b. The nominal interest rate is 6 percent, and the inflation rate is 2...

a. Your family takes out a mortgage and buys a new house.

Investment, because households can rise or fall in price over time.

b. You use your $100 paycheck to buy stock in Apple.

Savings, because your using left over money and putting it somewhere you cannot spend it.

c. Your sister takes out $100 from her bank deposits and buys a bicycle to deliver newspaper.

Investment, because you are buying something in hopes of making money.

d. You borrow $100 from a bank to buy an old iPod.

Consumption, because you are just buying something for now use. Just recreational.

2. The Federal Reserve conducts a $10 million open-market purchase of government bonds. If the required reserve ratio is 10 percent, what is the largest possible increase in the money supply that could result? Explain. What is the smallest possible increase? Explain.

* The largest possible increase in the money supply is $100 million, because of the money times the money multiplier which is the money times 1 over the reserve ratio.

* The smallest possible increase in the money supply is $10 million, because if the banks would have never gave out money then the banks will start off with $10 million dollars.

3. Assume that the reserve requirement is 4 percent. By how much can the money supply expand if the Federal Reserve buys $2,000 worth of bonds assuming that the banks keep the minimum reserve and people do not hold any cash?

$50,000

4. If the tax rate is 40 percent, compute the before-tax real interest rate and the after-tax real interest rate in each of the following cases.

a. The nominal interest rate is 10 percent, and the inflation rate is 5 percent.

Before-tax real interest rate- 5%

After-tax real interest rate- 1%

b. The nominal interest rate is 6 percent, and the inflation rate is 2...