Explain how a change in the reserve ratio affects the money supply.
What will be an ideal response?
An increase in the reserve ratio will decrease the size of the monetary multiplier and decrease the excess reserves held by commercial banks, thus causing the money supply to decrease. A decrease in the reserve ratio will increase the size of the monetary multiplier and increase the excess reserves held by commercial banks, thus causing the money supply to increase.
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Which of the following is most likely to restore an economy to full employment, if it is operating below full employment due to a decrease in net exports?
A) Devaluation of the domestic currency B) A decrease in the demand for goods and services in the economy C) A decrease in investment in the economy D) An increase in the interest rate
Suppose tennis shoes cost $50 per pair and firms supply 50,000 pairs of shoes. If the price decreases to $45 and firms decide to supply 48,000, the elasticity of supply equals
A) 0.0025. B) 0.04. C) 2.63. D) 0.39.