Question

Suppose a bank has $1 million in deposits, a reserve requirement of 10%, and bank reserves of $300,000. The bank has excess reserves of:
Question 16 options:

a)

$200,000.

b)

$100,000.

c)

$300,000.

d)

$50,000.

f the economy is producing at an output level below full employment, the government should __ spending and __ taxes.
Question 9 options:

a)

increase; decrease

b)

decrease; decrease

c)

decrease; increase

d)

increase; increase

The following diagram represents the economy experiencing inflation at point A. If the Federal Reserve wanted to bring the economy back to full employment, it would engage in __ monetary policy by __ bonds.

Question 6 options:

a)

expansionary; selling

b)

contractionary; buying

c)

contractionary; selling

d)

expansionary; buying

Answer 1

A) Total deposits = $ 1,000,000

Reserve requirements = 10% of deposits = 1,000,000 * 0.1 = $ 100,000

Total reserves bank have = 300,000

Excess reserve = Total reserves - Reserve requirements

= 300,000 - 100,000

= $ 200,000

B) If economy's output is below the full employment level, then the output can be increase in the economy if the aggregate demand will increase (as per keynesian economy, demand creates its own supply. The aggregate demand can be increased if government will increase its expenditure. The aggregate demand can also be increased if the if the taxes are reduced because lower taxes implies higher disposable income and hence the higher consumption expenditure in the economy. Hence Ans: (A) option.

C) If economy's output is below the full employment level, then the output can be increase in the economy if the aggregate demand will increase (as per keynesian economy, demand creates its own supply). The demand can be increased if the central bank will undertake expansionay monetary policy by selling its bonds. This expansionay monetary policy will increase the aggregate demand by increase the investment spending in the economy , as due to the increased money supply, people will put their money in bonds and hence the price of bonds will increase and as we know that the bond price and the interest rate are in inverse relationship, Hence the interest rate in the economy will decline and the investment spending will increase. Ans : A