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1
1.
A firm will choose to operate rather than shut down as long as
A) price is greater than or equal to AFC.
B) AFC is greater than AVC. C) price is greater than or equal to AVC. D) AVC is areater than MC.
2.
Lowering the discount rate will decrease reserves, encourage banks to make fewer loans, and decrease the money supply. increase reserves, encourage banks to make more loans, and decrease the rnoney supply. increase reserves, encourage banks to make more loans, a. increase the money supply. decrease reserves. encourage banks to make fewer loans, and increase the money supply.
3)
Item
Currency held outside banks: 900 billion
Demand deposits: 1,200 billion
Traveler's checks: 300 billion
Other checkable deposits: 400 billion
Savings accounts: 600 billion
money market accounts: 300 billion
Other near monies: 800 billion
Based on this data:
Assume the banking system has $300 billion in demand deposits and $30 billion in reserves. In addition, assume that the required reserve ratio is 5 percent. Answer the following questions:
- How much excess reserve is in this system?
- What is the value of the money multiplier?
- What is the maximum amount of change in demand deposit creation that could take place if the banking system lent out all of its excess reserves?
Expert Solution
1)
A firm will choose to be operational when its price are higher than or equal to average variable cost in the long run.
Price (P) = Average Variable Cost (AVC) is the last point of production. it is called " shutdown point'.
The correct option is "C".
2)
A lower discount rate increases the demand for it and banks afford to lend more. It increases lending, lending increases deposits and deposits increases reserves in the banking system, in total increases money supply. So, as lower discount rate lower the cost of loans for the banks as they can borrow cheap which will increase money supply.
The correct option is 3rd "increase reserves, encourage banks to make more loans and increase the money supply".
3)
A) Computation of Excess Reserve is in this System:
Required Reserves = 5% of $300 billion = $15 billion
Excess Reserves = Total Reserves - Required Reserves
= $30 billions - $15 billions
Excess Reserves = $15 billions
B) Computation of Money Multiplier:
Money Multiplier = 1/Required Reserve Ratio = 1/0.05 = 20
C) Computation of Maximum Amount of Change in Demand Deposit Creation:
When all excess reserves are loaned out,
Then maximum increase in money supply = $15 billion * 20 = $300 billion
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