What may limit the size of the money supply expansion to an amount less than indicated by the oversimplified deposit creation formula?
The oversimplified deposit creation formula is based on several rather unrealistic assumptions. They are that the banks in the system will lend all their excess reserves; the loan proceeds will all be taken in the form of checking deposits and redeposited in other banks, and that individuals and firms will hold no cash balances. If any of these assumptions are violated then there will be less excess reserves for banks to lend and, therefore, less new money created.
You might also like to view...
Indifference curves that are thick violate
A) the assumption of transitivity. B) the assumption that more is better. C) the assumption of completeness. D) none of the assumptions.
The "natural rate of unemployment" is
a. the highest unemployment rate that can be tolerated b. affected by social programs c. not accepted among economists d. likely to be above 10 percent e. not an economic concept
What is the present value of $777 in one year if the current rate of interest is 7 percent?
A) $831.39 B) $726.17 C) $457.06 D) $111.00
In their surveys of consumers, Daniel Kahneman, Jack Knetsch and Richard Thaler found that
A) most people considered an increase in price by firms following an increase in their costs to be fair but believed it was unfair for firms to raise their prices because of an increase in demand. B) most people considered it unfair for firms to raise their prices because of an increase in their costs, but fair to raise their prices after an increase in demand. C) most people believed that low-income people were hurt most by increases in prices. D) most people considered any increase in price to be unfair as it led to an increase in profits.