On a certain date, the banking system had $2 billion in excess reserves. The legally required reserve ratio was 12.5 percent. Potentially, the banking system as a whole could increase its loans a maximum of
Answer(s): D
The deposit expansion multiplier in this economy is 8 (found by taking the inverse of 12.5%=1/(.125)). Since banks hold an excess $2 billion in reserves they could extend loans in this amount and increase the money supply by 8 x $2 billion = $16 billion.
Structural unemployment is a result of
Structural unemployment occurs because there are structural characteristics of the economy that make it difficult for job seekers to find employment and employers to hire workers. Basic structural characteristics of the economy make it difficult for employees and employers to "match up." Unemployment due to this structure of the economy, means that unemployed workers do not possess the skills necessary to fill available jobs.
Which of the following is a false statement?
Answer(s): B
CPI is designed to measure the changes in the price level of consumer goods only. Since GDP includes productions in all sectors, not just the consumer sector, consumer price inflation is inadequate to calculate real GDP from nominal GDP.
Which of the following best describes the relationship between the velocity of money and the demand for money?
When decision makers conduct a specific amount of business with a smaller amount of money, their demand for money balances is reduced. Each dollar, though, is now being used more often.Therefore, the velocity of money is increasing. Thus, for a given income level, when the demand for money declines, the velocity of money increases.
Which of the following lend support to supply-side economics?
Answer(s): C
Marginal tax rates are central to the effects postulated by Supply-side economists. According to this theory, an increase in marginal tax rates decreases the incentive to work. People to shift away from productive work and toward more leisure. Non-productive activities explicitly directed toward avoiding taxes increase and projects are selected at least partly due to their tax benefits and not necessarily due to their intrinsic merits. This leads to inefficient channeling of capital resources.
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