Explain the money multiplier and give two examples showing how much money could be generated from a single deposit. For each example, be sure to include the initial deposit amount, the reserve requirement ratio, the excess reserve amount, the money multiplier, and the potential total amount of money generated, rounding to the nearest tenth at each step.
What will be an ideal response?
Answers will vary but should demonstrate understanding that the money multiplier measures the potential amount of money that the banking system generates with each dollar of reserves. A potential example is: A bank receives a new deposit of $80,000 and has a reserve ratio of 5 percent, leaving it with $76,000 in excess reserves. The bank’s money multiplier is 20, meaning that the $80,000 deposit can potentially create $1,520,000 in new deposits.
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Consumer surplus is the:
a. number of consumers who are excluded from a market because of scarcity. b. amount of a good that consumers will buy at a price below the equilibrium price. c. amount consumers are willing to pay for a good minus the amount the consumers actually pay for it. d. amount consumers are willing to pay for a good minus the cost of producing the good.
The 2008 credit crunch occurred when banks reduced lending in response to a. the loss of asset value for mortgage backed securities and mortgage loans. b. having too little capital to satisfy capital requirements
c. an excess of bank capital. d. an increase in the required reserve ratio.
Adam Smith believed that people's pursuit of their own self-interests
a. tended to promote the general welfare
b. required the government's "invisible hand" to keep the economy running smoothly
c. might cause aggregate demand to be greater than aggregate supply
d. would increase the wealth of a nation, which was the quantity of gold and silver it owned
e. would decrease the wealth of a nation, which was its ability to produce goods and services
How does an increase in a country's exchange rate affect its balance of trade?
A) An increase in the exchange rate raises imports, reduces exports, and reduces the balance of trade. B) An increase in the exchange rate reduces imports, raises exports, and reduces the balance of trade. C) An increase in the exchange rate reduces imports, raises exports, and increases the balance of trade. D) An increase in the exchange rate raises imports, reduces exports, and increases the balance of trade.