"Money is debt." Critically evaluate. Banks are more likely to create M-1 when the economy is...

"Money is debt." Critically evaluate.

Banks are more likely to create M-1 when the economy is expanding than when it is experiencing a recession. Do you agree or disagree? Why?

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Expert Solution

*The bank are likely to create m-1 when the economy is expanding than when it is experiencing the recession

* When an economy is in recession it means there is slow growth , GDP is falling , price level is falling , there is unemployment , aggregate demand is low .

*Government revenue falls during recession because people have less income and less expenditure so government receives lesse income tax . If in this situation government increases taxes and cuts spending then there will be a contractionary fiscal policy .

*Aggregate demand will fall more due to reduction in spending . Total National Income will fall further due to less consumption ( increase in taxes leads to lower disposable income ) and less government purchases .

*This will drive the economy to further severe recession . So I disagree . Gvernment should pursue expansionary fiscal policy during ression or deliberately create a federal budget deficit

Rahul Sunny answered 9 months ago

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