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KNK bank receives a cash deposit of GHS 1,000. Assuming there is no cash drain(cashless economy), and all reserves are pushed into loans
a. What is the maximum amount of money that can be created from the deposit?
b. What is the total increase in money supply with the bank?
Why do we call mechanisms such as proportional income taxes and the welfare system auto-
matic stabilizers ? Choose one of these mechanisms and explain carefully how and why it
affects fluctuations in output.
What would the LM curve look like in a classical world? If this really were the LM curve that
we thought best characterized the economy, would we lean toward the use of fiscal policy or
monetary policy? (You may assume your goal is to affect output.
sidy; the other is a rise in income tax rates. Use the IS-LM model and the investment subsidy shift the investment schedule, to discuss the impact of these alternative policies on income,
interest rates, and investment.
der two assumptions: (1) The government keeps interest rates constant through an accommodating
monetary policy. (2) The money stock remains unchanged. Explain the difference in results.
of demand toward investment and away from consumption without, however, allowing ag-
gregate demand to go beyond full employment. What is the required policy mix? Use an IS-
LM diagram to show your policy proposal.
try to do? (Hint: Outline the benefits and costs of such a policy over time.)
a. Would you expect equilibrium income to rise or fall as a result of this change? Why? Check your answer with the following example: Suppose that, initially, c 5 .8, t 5 .25, and Y0 5 600. Now let DG 5 10 and DTR 5 210.
b. Find the change in equilibrium income, DY0.
c. What is the change in the budget surplus, DBS ? Why has BS changed?
monetary policy, or the reverse, within fairly broad limits. The real basis for choice lies in
many subsidiary targets, besides real GDP and inflation, that are differentially affected by
fiscal and monetary policies.” What are some of the subsidiary targets referred to in the
quote? How would they be affected by alternative policy combinations?
4. Why do we call mechanisms such as proportional income taxes and the welfare system auto-
matic stabilizers ? Choose one of these mechanisms and explain carefully how and why it
affects fluctuations in output.
