1. Imagine that a community college student finds a $100 bill on the floor of a classroom. Realizing that someone may eventually claim the money, the (honest) student decides to deposit all the money in a bank account (and not hold any part of the currency). If the bank keeps 5 percent of its deposits in reserves (a reserve ratio of 5 percent or .05):



a. How much of the initial deposit can the bank lend out?

b. What is the (simple) money multiplier in this economy?

c. What is the total amount of money created from the initial $100 deposit, including the initial deposit?



2. What are the goals of expansionary monetary policy and contractionary monetary policy?



3. What are the differences between demand-side policies and supply-side policies?



4. How do government deficits cause a “crowding out” of private investment?



5. What is an automatic stabilizer, and how might an automatic stabilizer slow an economic recovery?



6. Is monetary policy or fiscal policy the more effective short-term approach? Explain your answer.