EC 133// Exam III Questions


Exam III date: Monday, December 16, 2013: 2-4 p.m.

Please answer each question with a succinct essay.
1. Suppose the Federal Reserve’s Open Market Committee decides to purchase bonds on the
market. What is the anticipated impact on the money supply? Show your work by illustrating
the process of money creation/destruction by providing the ‘T-accounts’ of two hypothetical
banks. In this economy, the required reserve ratio is 10 percent.
2. Economist George Ayittey, in an interview on PBS about economic development in Africa, states
that of the 54 African countries, only 8 have a free press. For Africa’s economic development,
Ayittey argues strongly for the establishment of a free press. Why would a free press be vital for
the enhancement of property rights and the rule of law? How could a free press help reduce
corruption?
3. Explain what is moral hazard? Explain the Federal Reserve’s mandate to be the ‘lender of last
resort.’ Explain how the Fed, in acting as a lender of last resort, constitutes an instance of
institutionalized moral hazard.
4. What is the fiscal (spending) multiplier? How does direct government spending propagate
throughout the economy? What is the fiscal multiplier if the marginal propensity to consumer
is 0.90? Explain why (at least two reasons) anyone would oppose the arguments underscoring
direct government spending.
5. What is the most important factor in explaining increases in real GDP per capita in the long run?
6. Explain the arguments for and against active stabilization policy.