Part A Why is the money multiplier in the United States smaller than the inverse
ID: 1189349 • Letter: P
Question
Part A
Why is the money multiplier in the United States smaller than the inverse of the required reserve ratio? Provide one (1) reason.
Explain why depositing cash into a checking account does not change the money supply. Provide one (1) supporting fact.
Explain why the money supply does not change when one individual writes a check to another. Provide one (1) supporting fact.
Part B
Describe one (1) reason why the flexibility of wages and prices tend to favor the Keynesian economic view in the short run and one (1) reason why the flexibility of wages and prices tend to favor the classical economic view in the long run.
Explanation / Answer
If banks lend less than the maximum, accumulatingexcess reserves, then commercial bank money will be less than central bank money times the money multiplier which is inverse of reserve ratio.
Checking accounts are considered equivalent to cash as the customer can withdraw the money at any time. Thus banks don't include it as a part of deposit base. Thus the overall deposits remain the same and only the cash got converted to chechong account balance.
In the case of issuing check by one person to the another the deposit decrease in the bank of the issuer by the same amount as it increases for the receiver. For the economy as a whole the deposit and hence the money supply remains the same.