Please answer each questions in less than 100 words.
- Why is saving called a leakage? Why is planned investment called an injection? Why must saving equal planned investment at equilibrium GDP in the private closed economy? Are unplanned changes in inventories rising, falling, or constant at equilibrium GDP? Explain.
- Explain how sticky prices relate to the aggregate expenditures model. Why is this important?
- What is a recessionary expenditure gap? An inflationary expenditure gap? Which is associated with a positive GDP gap? A negative GDP gap?
- Why are taxes called a leakage? Why is government spending called an injection? Explain why this is important?
- What is the difference between an asset and a liability on a bank’s balance sheet? How does net worth relate to each? Why must a balance sheet always balance? What are the major assets and claims on a commercial bank’s balance sheet?
- Explain why the U.S. banking system is called a “fractional reserve” system. Why does the Federal Reserve require commercial banks to have reserves? What are excess reserves? How do you calculate the amount of excess reserves held by a bank? What is the significance of excess reserves?
- “When a commercial bank makes loans, it creates money; when loans are repaid, money is destroyed.” Explain how this works?
- Describe the multiple expansion of loans and money by the entire banking system. Why is this important?
Use Reference: McConnell, C. R., Brue, S. L., & Flynn, S. M. (2009). Economics: Principles, problems, and policies (20th ed.). Boston: McGraw-Hill Irwin.
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