James Morrison is a profit-seeking banker. His bank has $25 million in excess reserves. Mr. Morrison
Answer(s): D
A bank holding excess reserves can increase its profits by extending more loans and holding fewer excess reserves. This is because the excess reserves held by the bank do not earn any interest.However, excess reserves extended as loans earn a positive interest rate and therefore will allow the bank to make a positive profit. Excess reserves represent the portion of reserves held by the bank in excess of the required reserve ratio set by the Fed.
Inflation
Answer(s): C
Inflation can be measured by using price indexes. In general, these indexes are constructed by calculating the difference between the price of a basket of consumer goods in earlier and later years and dividing by the price of the basket in the first year.
Which of the following is/are true about aggregate demand?
Answer(s): A
An increase in real interest rates makes current consumption more expensive in terms of opportunity cost.Hence, when real rates rise, current demand falls. On the other hand, if future inflation is expected to be high, then consumers want to buy goods in the current period, raising aggregate demand. Similarly, if they expect the future to be prosperous, they will spend some of that expected future income on current consumption. Hence, both higher expected future inflation and future wealth will increase current demand.
"An erratic monetary policy is the primary sources of business instability and inflation." This view is held by
Monetarists believe that monetary policy has a powerful influence on the economy but also realize that there are lengthy and unpredictable time lags between the implementation of a monetary policy and the realization of its primary effects. Hence, an erratic monetary policy can lead to big instabilities in the economy.
How will an unanticipated increase in aggregate demand emanating from an increase in business and consumer optimism influence equilibrium output in the goods and services market?
Optimism concerning the future direction of the economy will stimulate investment. Investment today may be necessary in order to benefit fully from future opportunities. This will cause aggregate demand to rise; in response, output will rise as will prices (due to increased competition for output and resources).
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