Problem 1. Assume Bank One has $100,000 in demand deposits, $25,000 in reserve assets and $75,000 in loan assets. Further assume that the reserve requirement for all banks is 10% against outstanding demand deposit liabilities. Explain, using T-accounts, how the banking system could create a multiple amount of money given the assumptions cited above.
Problem 2. Explain (using the Keynesian C+I±G diagram to supplement your explanation) how an economy that is in a recession would benefit from (a) a large marginal propensity to consume (b) the multiplier effect (c) automatic stabilizers (d) expanding the national debt.
Problem 3. Why has the.U.S. been unable to achieve its economic policy goals of full employment, price stability and economic growth?