Answered: If the assumptions of the…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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If the assumptions of the multiplier-deposit expansion process hold, (with the required reserve ratio set at 20%), this deposit will ______(increase/decrease) the money supply by $_________

. (Note: Currency held by the public is counted in the money supply as part of M1.)

Which of the following assumptions is necessary for the money multiplier (mm) to be used in the equation D=E×mD=E×m (where D stands for the maximum checkable-deposit creation and E is the initial change in excess reserves)?

1. Banks hold no excess reserves.

2. Banks have perfect information about the creditworthiness of all borrowers.

3.The Federal Reserve has set the required reserve ratio between 5% and 10%.

If the above assumption did not hold, the change in the money supply would be _________ (less/greater) than you found because:

1. If banks held excess reserves, they would make fewer loans than they otherwise would.

2. The multiplier holds only as long as the required reserve ratio is between 5% and 10%.

3. Banks would make fewer loans than they would if they could perfectly observe borrowers' true creditworthiness.

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If the above assumption did not hold, the change in the money supply would be ________(less /greater) than you found because:

1. If banks held excess reserves, they would make fewer loans than they otherwise would.

2. The multiplier holds only as long as the required reserve ratio is between 5% and 10%.

3. Banks would make fewer loans than they would if they could perfectly observe borrowers' true creditworthiness.

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