Posted: December 11th, 2022

Macro Unit 4 Application Activity
Part 1
This time, NO FLIP VIDEO IS REQUIRED. Instead, you will need to complete and upload the
following to the Unit 4 assignment folder under the Assessments tab on our Brightspace page:
Banks and the Creation of Money
Let’s pretend that $1,000 is deposited in a bank, and that each bank loans out all of its excess
reserves. For each of the following required reserve ratios, calculate the amount the bank must
hold in required reserves, the amount that will be excess reserves and therefore can be loaned
out to borrowers, the deposit expansion multiplier, and the maximum amount that the money
supply could increase if all excess reserves are loaned out to borrowers. The first one has been
done for you because I love you.
XXXXXXXXXXXXXXX
Required Reserve Ratio of 5%
Required Reserve Ratio of 10%
Required Reserve Ratio of 15%
Required Reserves
$50
Excess Reserves
$950
Deposit Expansion Multiplier
20
Maximum Increase in the Money Supply
$19,000
Tools of Monetary Policy
Complete the table so that is indicates how the Federal Reserve could use each of the three
monetary policy tools to pursue an expansionary policy and a contractionary policy. One has
done for you.
Monetary Policy
Expansionary Policy
Contractionary Policy
Open Market Operations
Discount Rate
Raise the discount rate
Reserve Requirements
Federal Reserve Actions and Their Effects
Complete the table by inserting an up arrow or a down arrow in order to best indicate the
effect of the specific Fed action. The first one has been done for you.
Federal Reserve Action
Bank Reserves
Money Supply
Federal Funds Rate
Sold Treasury securities on the open market
Bought Treasury securities on the open market
Raised the Discount Rate
Lowered the Discount Rate
Raised the Reserve Requirement
Lowered the Reserve Requirement
More Fed Actions and Their Effects…A.K.A. Monetary Policy In Action
Let’s pretend the Federal Reserve wants to help the economy (AS/AD equilibrium is to the left of
the LRAS curve) move towards full-employment. Which type of monetary policy (expansionary
or contractionary) would the Fed most likely implement?
If the Fed decides the best way to do this is to use open market operations, it would
___________________ (buy or sell) Treasury securities.
In the short run, nominal interest rates should ________________________ (rise or fall)
because financial institutions have _______________________ (more or less) funds to lend out
because people have _____________________________ (bought or sold) their Treasury
securities to the Fed.
Real output in the short run should _______________________ (increase or decrease). This is
because with the ___________________________ (increase or decrease) in interest rates, the
interest-rate sensitive components of aggregate demand (AD) such as consumption and
investment will ____________________________ (increase or decrease).
In the short run, the average price level will ________________________________ (increase
or decrease) because the increase in demand can be met only if firms have the incentive to
produce _________________________ (more or less). An increasing price level provides this
incentive.
Therefore, in summary, an expansionary monetary policy IN THE SHORT RUN will expand the
money supply, which in turn ________________________ (increases or decreases) AD, which
in turn tends to ______________________________ (increase or decrease) both the price level
and output.
PART 2 ON NEXT PAGE
Part 2
For 15 of the 30 points of this Application Activity, you will need to complete at 70% of the Macro
Unit 4 Fall 2022 questions at our Knewton Alta site. These questions cover Chapters 14-15 in
our textbook. Please remember our Student invite link for our questions is
https://knerd.me/zrsmqp

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