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Homework answers / question archive / Attempts: Average: 73 11

Attempts: Average: 73 11

Economics

Attempts: Average: 73 11. The monetary multiplier Suppose that Deborah makes a new cash deposit of $85,000. If the assumptions of the multiplier-deposit expansion process hold, (with the required reserve ratio set at 25%), this deposit will increase the money supply by $255,000. (Note: Currency held by the public is counted in the money supply as part of M1.) Which of the following assumptions is necessary for the money multiplier (m) to be used in the equation D=Ex m (where D stands for the maximum checkable-deposit creation and E is the initial change in excess reserves)? O Borrowers use the entire loan amount to pay others, who will deposit all of the funds in a checking account. Borrower default rates are stable. O People's marginal propensity to consume does not rise with income. If the above assumption did not hold, the change in the money supply would be than you found because: If people kept some of the new money as cash rather than depositing it in another checking account, this cash could not, in turn, become a bank loan. If people's marginal propensity to consume rose with income, they would save less, removing money from the financial system. If borrower default rates were not stable, then the money creation process would be disrupted.

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