macroenomics dq 8 - initial real wage exceeds this...

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Hello professor and class, Banks create money through "fractional reserve banking." The depositors leave money with the bank in return for interest payments. Since most depositors don't actually withdraw most of their deposits at any given time, the bank can lend most of the depositors' money out, keeping only a small fraction of all deposits on hand as a reserve available for withdrawals by depositors. The total amount of money in existence thus increases with each new loan. A Recessionary Gap is the level of employment is achieved at a real wage. Suppose that the
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Unformatted text preview: initial real wage exceeds this equilibrium value. The gap between the level of real GDP and potential output, when real GDP is less than potential. An inflationary gap exists when equilibrium income is greater than full employment income. In such a case, workers would compete against one another to get resources with which to produce the output that is demanded, and costs would rise, with prices following them up. The nominal wage will rise as long as there is an inflationary gap....
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