Exam 2

Due date: October 26, 12 noon. Each question is valued at 20 points.

1. Explain the concept of a business cycle and each component within a typical cycle.
2. Explain the link between unemployment and the business cycle. Using the FRED data basis, what was the peak unemployment rate in each recession since 1948? What was the lowest rate between recessions during the same time period?
3. What are economic indicators and how are they used to help predict economic activity? Explain three of the indicators.
4. Explain the concept of the money multiplier and how the bank lending process results in increasing the money supply. In your answer, assume that $1 million of new money is injected into the system. If the required reserve ratio is 0.15, detail the first 10 rounds of money expansion. Include in your answer, at each round, the changes that will occur in total reserves, required reserves, excess reserves, lending, and the money supply.
5. Assume the federal reserve determines it is necessary to decrease the money supply. Using the concept of the portfolio decision, explain the impact of the fed's decision on corporate bond prices.