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Unformatted text preview: provided above will be considered. Answer 2 The multiplier for G is 1/(1-0.8). Hence an increase of G by 1 causes output to increase by 5. However the multiplier for TR is only 0.8/(1-0.8). Therefore TR have to increase by more than 1 (by 5/4) if output has to get at its potential level. A G-policy is better because the government deficit does not increase as much as with a Transfer policy. 3. The currency in circulation is about $700 billion and the amount of deposits is about $650 billion. Imagine that the reserve ratio is 10%, what is the (actual) money multiplier of this economy? Answer 3 This is the ratio between the supply of money and the monetary base, that is Currency in circulation+Deposits/(currency in circulation +reserves). Therefore it is equal to (700+650)/(700+65)=1.76 Summary Answer 3 ________________________...
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