Answered: (a). Which of the following assumptions…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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(a). Which of the following assumptions is necessary for the money multiplier (m) to be used in the equation D=E×m

(where D stands for the maximum checkable-deposit creation and E is the initial change in excess reserves)?

A. People's marginal propensity to consume does not rise with income.

B. Borrowers use the entire loan amount to pay others, who will deposit all of the funds in a checking account.

C. Borrower default rates are stable.

(b). If the above assumption did not hold, the change in the money supply would be ____ (less or more) than you found because:

A. If people kept some of the new money as cash rather than depositing it in another checking account, this cash could not, in turn, become a bank loan.

B. If people's marginal propensity to consume rose with income, they would save less, removing money from the financial system.

C. If borrower default rates were not stable, then the money creation process would be disrupted.

Definition Definition Capital reserves held by banks or financial institutions over and above the reserves that are required to be maintained by the regulator toward its liabilities and for internal controls. For commercial banks, excess reserve is the amount over the standard reserve as decided by the central bank. These excess reserve funds are available in the form of cash and cash equivalents.

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