Macroeconomics in US

Macroeconomics 8
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Macroeconomics 8
Part A
Response to Question 1
The money multiplier is equal to the change in aggregate money supply by the change in the monetary base. The money multiplier denotes how the first deposit results in a significant increase taken together money supply. For instance, the money multiplier is equal to 10 if the commercial bank acquires deposits amounting to $1 million, leading to total money supply amounting to $10 million. The money multiplier is a significant component of the banking system. It identifies that the monetary base or banks deposit are initially increased, the bank holds a certain fraction of the reserves and lends the remaining, and that people redeposit bank loans in the banks, enabling future increases in money supply and bank lending.
In the United States, the money multiplier is smaller than the inverse of the required ratio because the reserve ratio is usually a percentage of total deposits kept by banks in required reserves. The percentages usually range from 10% to 20%. Therefore, the money multiplier is equivalent to 1 divided by the reserve ratio. Therefore, it is possible to determine the value of money multiplier by using a known reserve ratio. For example, with a reserve ratio of 20%, the money multiplier will be 1/0.2=5, while having a reserve ratio of 5%, the money multiplier will be 51/0.05=20. As such, having total deposits amounting to $1 million and a 5% reserve ratio means that the bank can lend out $20 million.
Response to Question 2
Checking accounts denote bank accounts used daily for cash withdrawals and deposits. People can access their money using debit cards, by writing checks, or through using online money transfers. It is important to note that checking accounts do not usually have limits on the number of times a person can withdraw money. Besides, checking accounts are much different from savings accounts because they have significantly lower interest rates.
Depositing money into a checking account does not change the money supply because the money supply refers to the aggregate currency stock and other liquid money that circulates in the economy of a country at a particular time. The money supply is also known as money stock. It comprises of coins, cash, balances, and assets held in savings and checking accounts that individuals and corporations use to hold or make payments as short-term investments. As a result, depositing cash in a checking account has no impact on the money supply, because the money is already counted. For instance, if the money supply in the United States equals to $500, which comprises of $100 and $50 in both cash and checking accounts respectively. Although depositing the $50 from a cash account to a checking account would increase the total sum of money in the checking account, the money supply will remain unchanged.
Response to Question 3
Writing a check denotes the process whereby a person makes an order to a colleague’s bank, thus transferring money to another account. When writing a check, a person indicates the name of the payee, dates the check, and signs it. Moreover, the check writer identifies the total amount of money to be transf...