7. The money multiplier and the effects of bank runs Aa Aa Which of the followin
ID: 1216894 • Letter: 7
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7. The money multiplier and the effects of bank runs Aa Aa Which of the following statements about the money supply are true? Check all that apply Currency in circulation accounts for about half of the money supply The money supply is the sum of checkable bank deposits and currency in circulation Bank reserves are not part of the money supply Complete the following formula that defines the money multiplier by selecting the correct terms for the numerator and the denominator: Money Multiplier - Money Supply Reserve Ratio Monetary Base The following table shows U.S. monetary figures for 1929, the year in which the Great Depression began, and 1933, the year in which real GDP hit bottom during the Depression Currency in Circulation Checkable Bank Deposits (Billions of Dollars) $22.74 $14.82 -35% M1 1929 1933 Percent change $3.90 $5.09 +31% $26.64 $19.91 -25% Source: U.S. Census Bureau (1975), Historical Statistics of the United States Which of the following statements best explains the dramatic increase in currency in circulation? The price level rose rapidly, and people needed more cash for transactions Fear about the stability of banks led people to keep more money as cash Foreigners sent their accumulated stores of U.S. currency back into the American economy O The U.S. Treasury began printing unprecedented amounts of cashExplanation / Answer
7. Option B and C ate correct.
The narrowest definition of money states that the sun of the money in circulation and the checkable deposits constitute the money supply. This is the most liquid firm of money.
Bank reserves are not a part of money supply because they do not add to the multiplier and are not used in circulation or loans (or any other form). It is just kept in the vault.
8. Money multiplier = money supply/monetary base.
Money supply is determined by monetary base times the multiplier. Rearranging we get the money multiplier.
9. Option B is correct.
With the initiation of recession, the cash in the economy falls drastically because it began with the stock market crash. People held most of the cash in hand.
10. Money multiplier = money supply/monetary base.
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