FINAL Exam ECO201 - Not necessarily. The government is a...

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FINAL 1. If the Fed wants to increase the money supply through open-market operations, what does it do? The Fed buys bonds in the bond markets and then in turn creates new bank deposits at the Fed. The new bank deposits at the Fed adds to banks excess reserves, and can therefore form the basis of a multiple expansion of the money supply through new loan creation by banks. Open market purchases increase reserves and allow the banks to increase the money supply. . 2. If inflation is less than expected, who benefits—debtors or creditors? Explain If inflation is less than expected creditors benefit because the real rate of return on loans rises. 3. Should the federal government always balance its budget? Why or why not?
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Unformatted text preview: Not necessarily. The government is a permanent entity whose debt is backed by the government’s ability to tax the citizens in order to pay off the debt. Our government operates primarily in a deficit. 4. How do falling interest rates and falling prices influence total demand in the economy. Include the “wealth effect” in your answer. The real wealth effect measures the impact of a price change on the real value of wealth and its subsequent effect upon consumption and output. A decrease in interest rates and falling price levels will raise the real value of wealth which will result in more consumption spending. This will contribute to more production and an overall increase in output and income....
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This note was uploaded on 03/25/2012 for the course ECO 101 taught by Professor Lindsey during the Spring '12 term at Post.

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