When a bank funds the borrowing need of a local grocery store and as result of the bank providing this funding the grocery store can pay its vendors and those vendors can pay their employees. And, in turn the local economy in the community grows because of this currency circulation. This is an example of which of the following: 1. The money multiplier 2. The bank fulfilling its charter 3. The bank satisfying its requirements under the Community Reinvestment Act
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This is because when the bank funds the borrowing needs of the grocery store, it sets off a chain reaction where the money circulates through the local economy, benefiting various businesses and individuals. Show more…
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When money is spent on goods and services, those who receive the money also spend some of it. The people receiving some of the twice-spent money will spend some of that, and so on. Economists call this chain reaction the multiplier effect. In a hypothetical isolated community, the local government begins the process by spending $D$ dollars. Suppose that each recipient of spent money spends 100$c \%$ and saves 100$s \%$ of the money that he or she receives. The values $c$ and $s$ are called the marginal propensity to consume and the marginal propensity to save and, of course, $c+s=1$ . (a) Let $S_{n}$ be the total spending that has been generated after $n$ transactions. Find an equation for $S_{n} .$ (b) Show that $\lim _{n \rightarrow \infty} S_{n}=k D,$ where $k=1 / s$ . The number $k$ is called the multiplier. What is the multiplier if the marginal propensity to consume is 80$\% ?$ Note: The federal government uses this principle to justify deficit spending. Banks use this principle to justify lending a large percentage of the money that they receive in deposits.
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8. Money and the banking system I described a monetary system that included simple banks in Section 4-3. Assume the following: i. The public holds no currency. ii. The ratio of reserves to deposits is 0.1. iii. The demand for money is given by Md = $Y10.8 - 4i2 Initially, the monetary base is $100 billion, and nominal income is $5 trillion. a. What is the demand for central bank money? b. Find the equilibrium interest rate by setting the demand for central bank money equal to the supply of central bank money. c. What is the overall supply of money? Is it equal to the overall demand for money at the interest rate you found in part (b)? d. What is the effect on the interest rate if central bank money is increased to $300 billion? e. If the overall money supply increases to $3,000 billion, what will be the effect on i? [Hint: Use what you discovered in part (c).]
Oluwadamilola A.
A central bank that adopts a fixed exchange rate may sacrifice its autonomy in setting domestic monetary policy. It is sometimes argued that when this is the case, the central bank also gives up the ability to use monetary policy to combat the wage-price spiral. The argument goes like this: "Suppose workers demand higher wages and employers give in, but that the employers then raise output prices to cover their higher costs. Now the price level is higher and real balances are momentarily lower, so to prevent an interest rate rise that would appreciate the currency, the central bank must buy foreign exchange and expand the money supply. This action accommodates the initial wage demands with monetary growth and the economy moves permanently to a higher level of wages and prices. With a fixed exchange rate there is thus no way of keeping wages and prices down." What is wrong with this argument?
Jennifer S.
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