Problem Question

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  1. Draw a graph depicting interest rates at the quantity of loanable funds (such as the graph in figure 15.7). Answer the following questions regarding this graph.
    1. Explain why the demand of loanable funds is upward sloping.
    2. Explain why the supply of loanable funds is downward sloping.
    3. If the Federal Reserve sells government bonds, show what will happen to this graph. Explain the effects on interest rates and the quantity of loanable funds.
    4. If the Federal Reserve lowers the required reserve rate, show what will happen to this graph. Explain the effects on interest rates and the quantity of loanable funds.
  2. List and explain the logic behind the “four functions of money.” Then, consider the following: In many prisons, cigarettes are used as money. Do cigarettes in prison have the ability to satisfy
  3. these four functions? Explain. 
  4. For each of the following questions, evaluate whether the statement is “true” or “false”. Then, provide a brief explanation to justify your answer.
    1. If the velocity of money increases and nothing else changes, nominal GDP will rise.
    2. If the required reserve rate is 5%, bank runs will be more likely than if the required reserve rate is 20%.
    3. If the required reserve rate is increased from 10% to 20%, the amount of money in society will double.
    4. If the value of M1 increases and nothing else changes, the value of M2 will also increase.
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