This economics question tests your understanding of economic models and analysis. The step-by-step answer below applies the relevant framework and explains the reasoning.
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ASSIGNMENT 1: QUESTION 1 Here is the completed table: | Bank | New Deposit | New Liquid Asset | New Loan | Increase in Money | Total Increase in Money | | :--- | :---------- | :--------------- | :------- | :---------------- | :---------------------- | | 1 | 5 000 | 500 | 4 500 | 5 000 | 5 000 | | 2 | 4 500 | 450 | 4 050 | 4 500 | 9 500 | | 3 | 4 050 | 405 | 3 645 | 4 050 | 13 550 | | 4 | 3 645 | 364.50 | 3 280.50 | 3 645 | 17 195 | | 5 | 3 280.50 | 328.05 | 2 952.45 | 3 280.50 | 20 475.50 | Calculations for the table: New Liquid Asset = New Deposit × 10% (Liquid Asset Ratio) New Loan = New Deposit - New Liquid Asset Increase in Money = New Deposit (for that bank) Total Increase in Money = Cumulative sum of "Increase in Money" Bank 3: New Deposit: 4,050 (loan from Bank 2) New Liquid Asset: 4,050 × 0.10 = 405 New Loan: 4,050 - 405 = 3,645 Increase in Money: 4,050 Total Increase in Money: 9,500 + 4,050 = 13,550 Bank 4: New Deposit: 3,645 (loan from Bank 3) New Liquid Asset: 3,645 × 0.10 = 364.50 New Loan: 3,645 - 364.50 = 3,280.50 Increase in Money: 3,645 Total Increase in Money: 13,550 + 3,645 = 17,195 Bank 5: New Deposit: 3,280.50 (loan from Bank 4) New Liquid Asset: 3,280.50 × 0.10 = 328.05 New Loan: 3,280.50 - 328.05 = 2,952.45 Increase in Money: 3,280.50 Total Increase in Money: 17,195 + 3,280.50 = 20,475.50 Question 4: Step 1: Identify the liquid asset ratio (reserve ratio). The liquid asset ratio is given as 10%, or 0.10. Step 2: Calculate the credit creation multiplier. The credit creation multiplier (or money multiplier) is the reciprocal of the reserve ratio. Credit Creation Multiplier = (1)/(Reserve Ratio) Credit Creation Multiplier = (1)/(0.10) Credit Creation Multiplier = 10 Question 5: Step 1: Identify the initial deposit and the credit creation multiplier. Initial Deposit = 5,000 Credit Creation Multiplier = 10 Step 2: Calculate the total increase in money. Total Increase in Money = Initial Deposit × Credit Creation Multiplier Total Increase in Money = 5,000 × 10 Total Increase in Money = 50,000 ASSIGNMENT 2: MONETARY POLICY & FISCAL POLICY QUESTION 1: To reduce the level of economic activity, the central bank would use open market operations by selling government securities. When the central bank sells securities, commercial banks purchase them, which reduces their reserves. This decrease in reserves limits the amount of money banks can lend, leading to an increase in interest rates. Higher interest rates discourage borrowing and investment, thereby slowing down economic activity and reducing inflation. QUESTION 2: Here are three objectives of budget outcomes: Budget Surplus: The objective is to reduce national debt, save for future needs, or build up reserves for economic downturns. A surplus means government revenue exceeds spending. Budget Deficit: The objective is often to stimulate economic growth during a recession or to fund significant public investments. A deficit means government spending exceeds revenue, typically financed by borrowing. Balanced Budget: The objective is to maintain fiscal stability and avoid increasing national debt. A balanced budget occurs when government revenue equals government spending, aiming for neutrality in its impact on the economy. That's 2 down. 3 left today — send the next one.