Question

Please fully define each of the following terms. You may also draw graphs to supplement your definition:

Total reserves

Crowding out

Full employment GDP

Discount rate

Answer 1

1 - Total reserves - These are the amount in the banking system that are the assets of the bank. This is the amount in the banking system for the complete honouring of its liabilities. The reserve can be divided into Required reserve which is mandatorily required to be maintained as per guideline of central bank. The remaining amount is excess reserve which is used for creation of loans.

2 - Crowding out effect is the phenomenon of the economy. In this , if the government increases the spending in order to increase the level of investment in the economy and raise GDP , then the real interest rate rises rather than falling and it leads to the failure of the policy.

3 - Full employment GDP is the level of GDP where AD = SRAS = LRAS. At this level , the economy is functioning at its full potential level , the inflation is at the target rate , the employment is at the full level. The economy is said to be at the stable level at this point. Below this level , economy is under recession and above this level , economy is under inflation.

4 - Discount rate is the rate at which the commercial banks discount their short term securities such as the treasury bills , commercial paper at the discount window of fed. Through this rate , the fed provides the short term loans to the banking system.