Suppose the Fed buys government securities from a commercial bank. Why is there a multiplier effect on the quantity of money?
What will be an ideal response?
When the Fed buys government securities from a bank, the payment to the bank is in the form of reserves. Hence the bank gains excess reserves. The bank can loan these excess reserves. When the loan is spent, the recipients deposit some or all of the funds in their banks. These banks gain deposits (which increase the quantity of money) as well as excess reserves. The "second round" banks then loan their excess reserves. And when these loans are spent, once again the recipients deposit some or all of the funds in their banks. These third-round banks thereby gain deposits (which further increases the quantity of money) as well as excess reserves. These reserves are loaned, spent, and then deposited in a fourth round of banks, which still further increases the quantity of money. Hence the process of loaning and depositing the proceeds increases the quantity of money by a multiple of the initial amount of the open market operation.
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The pleasure or satisfaction obtained from goods and services is known as:
A. Price elasticity of demand. B. Total revenue. C. Utility. D. Ceteris paribus.
In the United States, the money for loans to businesses comes mainly from
a. corporate profits. b. the federal government. c. savings held in lending institutions. d. state and local governments.
A college student is thinking about running an ice-cream truck over the summer. What would economists say is the student's main objective?
A. To maximize hourly earnings B. To maximize his profit C. To spend as little on inputs as possible D. To sell as many ice cream cones as possible
An optimizing consumer will select the consumption bundle in which the
a. ratio of total utilities is equal to the relative price ratio. b. ratio of income to price equals the marginal rate of substitution. c. marginal rate of substitution is equal to the relative price ratio of the goods. d. marginal rate of substitution is equal to marginal utility.