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ECO 3203 Review for Final Exam (Chapters 9, 10, 14)




Question;Chapter 9:1. Define: Bank Assets, liabilities, Capital, Capital Ratio and Leverage Ratio. If a banks Assets are 200and Liabilities are 60 what is the capital of this Bank? What is the Capital Ratio? What is the leverageratio?2. Define insolvency and illiquidity. Explain how these terms relate to the crisis in the 2000s.3. What was done to the Federal Deposit Insurance to assist with the recovery? (be specific)4. Explain what is meant by the liquidity trap. Also discuss the implications of a liquidity trap for theshapes of the money demand and LM curves.5. Suppose a liquidity trap exists. Graphically illustrate and explain the effects of an increase ingovernment spending using the IS-LM model.6. Suppose a liquidity trap exists. Graphically illustrate and explain the effects of an increase in moneysupply using the IS-LM model.Chapter 10:1. When assuming that there are two inputs, capital and labor, what is the new aggregate productionfunction?2. Show an example of constant returns to scale in the aggregate production function.3. Suppose the capital stock increases by 10% and the number of employed workers increases by5%. Given this information, explain what will happen to output and to output per worker.4. Define: decreasing returns to capital and decreasing returns to labor. Give an example or each.5. What does sustained growth require?6. Consider the production function, Y=, write the production function as a relation between outputper worker and capital per worker.7. Consider the production function, Y=a. Compute output when K=81 and N=100.b. Is this production function characterized by constant returns to scale? Explain.Chapter 14:1. Explain what the Fisher effect/Fisher hypothesis represents.2. What is meant by the "natural real interest rate."?3. To reduce the nominal interest rate in the short run, what type of policy should the central bankpursue? Explain.4. Using the IS-LM model, graphically illustrate and explain what effect a reduction in money growth willhave on output, the nominal interest rate, and the real interest rate in the short run.


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