Answer to Question #82794 in Macroeconomics for Marija Borcic

Question

3. Historically, shifts towards a more expansionary monetary policy have often been associated with increases in real output. (25 points)

a) Is this surprising? Why or why not?

b) Can an expansion in money supply increase real output and employment permanently? Why or why not?


4. Suppose you deposit $1000 scholarship check in the bank. If the required reserve ratio is 10%, explain the process through which the banking system will create new money. How much money can potentially be created by the entire banking system as a result of this deposit? (10 points)

Answer 1

3. a) It is not surprising, because in the short-run expansionary monetary policy will increase aggregate demand, which will increase the price level and real output level.

b) An expansion in money supply can't increase real output and employment permanently, if it is the only policy implemented, because in the long-run the level of real output and employment may decrease back.

4. If you deposit $1000 scholarship check in the bank and the required reserve ratio is 10%, then the bank can lend 90% of this sum to other people or banks, so it will create new money. The entire banking system can potentially create $1,000/0.1 = $10,000 as a result of this deposit.