Question

13.Which of the following are constraints on deposit creation?

1. The decision by banks to stop lending money to qualified borrowers
2. All of the above
3. The decision by consumers, businesses, and governments to stop borrowing
4. The decision by consumers and businesses to take money out of transactions accounts and hold it as cash

14.Which of the following is an example of fiscal policy?

1. All of the above
2. A change in government spending on goods and services
3. A change in taxes that affects investment spending
4. A change in taxes that affects consumer spending

15.According to the foreign trade effect, when the U.S. price level decreases, U.S. consumers are likely to buy

1. Less of all products, both American made and foreign made
2. More foreign-made products
3. More American-made products
4. Different American-made products

Answer 1

13) There are three constraint on Deposit Creation:

• Consumers are willing to accepts checks rather than cash.
• Consumers are willing to borrow money from banks.
• Fed have the authority to limit Deposit Creation.

When one bank loses cash to other banks, it is known a Deposit Creation. Profit of one bank is loss of another bank. Thus if banks refuse to give money borrowers, they would have enough money with themselves which would not create a problem of Deposit Creation. When people takes money in the form of cash, it would reduce the risk of loosing money to any other bank. Thus option B is correct.

14) Fiscal policy includes policies related to the Government expenditure and Taxes which affects the investment and consumption pattern of households. Thus option A is correct.

15) When U.S. price level decreases, consumers there are more likely to buy Domestic products as consumers are always induced by the lesser prices of a product because it reduces their expenditure level.