Hermesia, a developed economy, has been experiencing low growth in output with a
ID: 1219198 • Letter: H
Question
Hermesia, a developed economy, has been experiencing low growth in output with a high rate of unemployment for more than a year. Two member of national trade union in Heremisa, Geoffrey Miller and Arthur Davis are discussing the relevant expansionary policies that can be taken by the central bank or the government to stimulate economic growth in Hermesia. Geoffrey suggests that the central bank should substantially lower the reserve requirements of the commercial banks so that money supply and household spending both increase. Arthur, however disagrees. According to him, a decrease in the reserve requirements will not have the desired impact on money supply. He believes that an increase in government spending is more likely to boost the economy than an expansionary monetary policy. Which of the following, if true, will weaken Geoffrey's claim that lowering the reserve requirement will have a strong positive impact of demand? A. The government of Hermesia recently introduced unemployment insurance which is expected to increase government expenses by five percent this year. B. Foreign commercial banks operating in Hermesia account for 10 percent of the overall deposits held by commercial banks in this country C. Due to a recent recession in Hermisa, consumers are still uncertain about economy's prospects in spite of positive growth rate. D. The deposit multiplier in Hermesia is very high E. Money supply growth in Hermesia has been very low at 0.9 Percent over the last two years.
Explanation / Answer
Option C.
Since consumers are uncertain about the economy's prospects, any increase in the money supply in the economy will not translate into increase in the aggregate demand of the economy.