Assignment 08c11e Macroeconomics Directions Be Sure To Save

Assignment 08c11e Macroeconomicsdirections Be Sure To Save An Electr

Be sure to save an electronic copy of your answer before submitting it to Ashworth College for grading. Write your responses in complete sentences, ensuring proper English, spelling, and grammar. Cite all sources in APA format. Your response should be four double-spaced pages, following the specific format requirements provided on the Course Home page.

Paper For Above instruction

Part A:

  1. Why is the money multiplier in the United States smaller than the inverse of the required reserve ratio? Provide one reason.
  2. Explain why depositing cash into a checking account does not change the money supply. Provide one supporting fact.
  3. Explain why the money supply does not change when one individual writes a check to another. Provide one supporting fact.

Part B:

  1. Describe one reason why the flexibility of wages and prices tends to favor the Keynesian economic view in the short run, and one reason why it tends to favor the classical economic view in the long run.
  2. Refer to the figure below and explain what happens in each graph (A, B, and C) when an economy moves from a recession (point a) back to full employment.

Paper For Above instruction

The complexities of macroeconomic dynamics reveal that the magnitude of the money multiplier in the United States often falls short of the inverse of the required reserve ratio. One primary reason is the phenomenon of excess reserves held by banks. Banks often keep reserves beyond the mandated minimum as a safeguard against unexpected withdrawals or failures, which diminishes the overall lending capacity of the banking system and consequently reduces the money multiplier. This behavior is driven by risk aversion, economic uncertainty, and regulatory expectations, which cause banks to hold liquidity that limits the expansion of the money supply despite the central bank's reserve requirements (Mishkin, 2019). Therefore, even if the reserve ratio remains constant, the actual process of money creation becomes constrained, leading to a smaller multiplier than theoretically predicted by simply inverting the reserve ratio.

Depositing cash into a checking account does not alter the total money supply because it merely shifts the form of money from physical cash held by the public to deposit money held by banks. The total amount of money available in the economy remains unchanged as a result of this transaction (Heffernan, 2015). When individuals deposit cash, the supply of currency in circulation decreases by the same amount that the bank's reserves increase, maintaining the overall money supply constant. This transfer does not create new money but only changes its composition and location within the financial system, preserving the aggregate monetary base.

Similarly, when an individual writes a check to another person, the total money supply in the economy remains unaffected because the transaction is essentially a transfer of existing deposits. The recipient's bank account increases by the amount of the check, while the sender's account decreases correspondingly. This process redistributes existing funds without generating new money (Mishkin, 2019). The fundamental principle here is that the check functions as a claim to existing funds rather than a source of new money, so the overall monetary aggregate remains stable. The increase in one account is offset by a decrease in another, keeping the total money supply constant.

In the short run, the flexibility of wages and prices tends to support the Keynesian economic perspective. Keynesian theory emphasizes that wages and prices are sticky downward, meaning they do not easily decrease when the economy is in recession. This stickiness prevents wages from falling quickly enough to restore full employment, leading to prolonged periods of unemployment and underutilized resources (Mankiw, 2016). As a result, Keynesians advocate for active fiscal policy measures to stimulate aggregate demand, as market forces alone may be insufficient to achieve equilibrium.

Conversely, in the long run, the flexibility of wages and prices favors the classical economic view. Classical economists argue that wages and prices are flexible over extended periods, allowing markets to clear and resources to be fully employed once the economy adjusts. Price and wage flexibility ensures that any disequilibrium in the market is temporary, and the economy naturally returns to its potential output without the need for government intervention. Over time, flexible wages allow labor markets to adjust, and flexible prices enable goods and services markets to equilibrate, aligning with the classical notion of market self-correction (Blanchard & Johnson, 2013).

Referring to the provided figure (not shown but described), when an economy transitions from a recession point (a) back to full employment, in Graph A, the aggregate demand curve shifts to the right, reflecting increased demand that helps eliminate unemployment. In Graph B, the short-run aggregate supply may also shift rightward as wages become more flexible, leading to higher output levels. In Graph C, the long-run adjustment occurs as full employment is restored through market mechanisms adjusting wages and prices without government intervention. Essentially, the combined movements of these curves depict the economy's natural correction from recession to full employment, illustrating classical and Keynesian theories' intersection in the adjustment process.

In conclusion, understanding the nuances of monetary and fiscal dynamics underscores the importance of behavioral and structural factors such as bank reserve policies, the nature of deposits, and wage-price flexibility. These elements influence how economies respond to shocks and recover over time, shaping policy recommendations in contemporary macroeconomics.

References

  • Blanchard, O., & Johnson, D. R. (2013). Macroeconomics (6th ed.). Pearson.
  • Heffernan, S. (2015). Modern Bank Management. John Wiley & Sons.
  • Mankiw, N. G. (2016). Principles of Economics (7th ed.). Cengage Learning.
  • Mishkin, F. S. (2019). The Economics of Money, Banking, and Financial Markets (12th ed.). Pearson.

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