1. The following is a simplified balance sheet for Mi Tierra Bank in the United States.
Mi Tierra Bank

(a) What is the reserve requirement? 10%
(b) Assume that Luis withdraws $5,000 in cash from his checking account at Mi Tierra Bank.
 (i) By how much will Mi Tierra Bank’s reserves change based on Luis’ withdrawal? decrease by 5000
 (ii) What is the initial effect of the withdrawal on the M1 measure of money supply? Explain. no change
 (iii) As a result of the withdrawal, what is the new value of excess reserves on the balance sheet of Mi Tierra Bank based on the reserve requirement from part (a) ? 500
(c) Assume that the next day John withdraws from Mi Tierra Bank an amount that exceeds the bank’s excess reserves. Assuming that no loans are called in, how can Mi Tierra Bank cover its required reserves?  borrow from another bank

2. Assume the United States is in a recession. 
(a) if nominal interest is 5% and inflation is 3%, what is the real interest rate. r=i-inflation
2%=5-3
(b) The United States government increases spending on goods and services by $100 billion, which is financed by borrowing. How will the increase in government spending affect each of the following?
(i) real interest rates- increase
(ii)  unemployment-  decrease
(c) If the marginal propensity to consume is equal to 0.75, calculate the maximum possible change in real gross domestic product that could result from the $100 billion increase in government spending.  1/Mps= 1/.25=4 x100= 400billion
(d) Using a correctly labeled graph of the loanable funds market, show the effect of the $100 billion increase in government spending on the real interest rate.
(e) Based on the real interest rate change in part (d), what is the effect on the long-run economic growth rate? Explain. Decrease LRAS shift to the left
(f) Now assume that instead of financing the $100 billion increase in government spending by borrowing, the United States government increases taxes by $100 billion. With this equal increase in government spending and taxes, will the real gross domestic product increase, decrease, or remain the same? Explain.   -Mpc/mps= .75/.25=3 x100= 300bilion
increase by 100 billion
3. The unemployment rate is an important indicator of the health of the United States economy
a) Assume that with the economy at full employment, the government implements an expansionary fiscal policy. How does the actual unemploymentrate at the new short run equilibruim compare to the natural rate of unemployment ( Full employment line)
UR decrease to the left of the natural rate ( LRPC)
b) Assume that a significant number of workers are involuntarily changed from full time to part time workers. Explain how this will affect the number of people who are officially classified as unemployed.  Stays the same, Part time as being employed

c. Assume the government reduces the level of unemployment compensation
	i. Explain how this affects the natural rate of unemployment decrease 
	ii. On a SRPC graph with LRPC what direction will LRPC shift. LRPC shift to left