Question #1: Why is the money multiplier in the United States smaller than the inverse of the required reserve ratio? Provide one (1) reason.
Answer#1: The banks of the United States are generally known to be the ones that give out their excess reserves as loans. Had this practice was not in place, then the same banks would have been creating lesser loans and hence lesser money.
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Question #2: Explain why depositing cash into a checking account does not change the money supply. Provide one (1) supporting fact.
Answer#2. The checking account of the bank is not the actual place where money moves. It is the safe maintained by the bank, however. Also, money is given to those people who are in need of cash advance and withdrawal. Banks also utilize the money in order to pay bills and to the people.
Question #3: Explain why the money supply does not change when one individual writes a check to another. Provide one (1) supporting fact.
Answer#3. As a matter of fact, the supply of the money is dependent upon the amount being deposited in the banks. If a Cheque is written to someone else’s name, it does not, in any manner, affect the deposit. If in case, the deposit is not affected, the money supply is not affected either and hence no variation in the supply of money is recorded. If for an example, the commercial banks get $ 1 million in deposits, then a final money supply of $10 million will be led by the bank.
Question #4: Describe one (1) reason why the flexibility of wages and prices tend to favor the Keynesian economic view in the short run and one (1) reason why the flexibility of wages and prices tend to favor the classical economic view in the long run.
Answer #4.According to Keynesian, the inference of the short run cannot be inferred by the knowing what is going to happen in the long run as we all are always living in the short run. He further adds that as we live in the short run, no one will be available there for making decisions. In case of prices being rigid, the real effects on output and employment are produced by monetary policy. The same principle is applicable to nominal wages in dollars and not for the case of real purchasing power. The Keynesian economic view is generally favored by prices and wages. The reasons for that are when prices become rigid, fluctuations are also recorded in component of spending. Hence, the output is fluctuated for the case of government expenditure, investment and consumption.
The economist view in the long run is always favored by the classical economy in the case of a view held by the states regarding the achievement of equilibrium by the aggregated markets in long run without having an intervention on the part of the government.
Question #5: Refer the figure below and explain what happens in each graph (A, B, and C) when an economy is moving from a recession (point a) back to full employment.
Answer#5. Graph A: Any country’s economy is normally affected by the long run in a way that only structural and frictional unemployment remain intact while the price levels are being stabilized. In the case of short run, however, the rigidity of the prices prevents the economy from attaining its potential output. Or simply, with the increase in output prices, there is a significant reduction on the basis of long term while increment in the short run.
Graph B: A sharp increment in the prices are caused by an equal increment in money market. However, with a continuity of this situation on long term basis, the price decrement is recorded with the increase in money market.
Graph C: It is seen that, whenever an economy recovers from recession, a notable increment in the number of investments is also recorded. If this situation continues then the price making the investment decreases with the rise of investments.