26) Suppose that a commercial bank has $100 million of assets and that its capital consists of
$10 million of equity. In addition, the bank’s return on assets is 1 percent. Calculate the return
on equity (ROE) for this bank. 27) If, in a particular year, the government ran a budget deficit of $200 billion and the private
sector’s holdings of government securities increased by $100 billion, what is the likely dollar
increase in the monetary base resulting from the budget deficit? Page 1 of 3 28) Assume that an economy, in which all deposits issued by commercial banks are demand
deposits, is characterized by the following information:
Ratio of currency to demand deposits:
0.20
Required reserve ratio (ratio of required reserves to demand deposits): 0.10
Excess reserve ratio (ratio of excess reserves to demand deposits):
0.05
Total monetary base:
$100 billion
Calculate the values of the M1 multiplier and of the total stock of M1. 29) Assume that the U.S. economy in a particular period is characterized by the following data:
Actual inflation rate:
4 percent per year
Target inflation rate:
2 percent per year
Equilibrium real interest rate:
3 percent per year
Output gap (percentage excess of output over potential output): 2 percent
From the above data, calculate the value of the federal funds rate that would be prescribed by the
Taylor rule. Page 2 of 3 30) Suppose that an economy recorded the following growth rates in a particular year:
Percentage change in the real stock of money:
Percentage change in nominal GDP:
Percentage change in the price level (the GDP deflator): 4 percent
6 percent
1 percent From the above information, calculate the percentage change in the velocity of money. Page 3 of 3

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