Discussion:
Part A
1. Why is the money multiplier in the United States smaller than the inverse of the required reserve ratio? Provide one reason.
2. Explain why depositing cash into a checking account does not change the money supply. Provide one supporting fact.
3. Explain why the money supply does not change when one individual writes a check to another. Provide one supporting fact.
Part B
1. Describe one reason why the flexibility of wages and prices tend to favor the Keynesian economic view in the short run and one reason why the flexibility of wages and prices tend to favor the classical economic view in the long run.
2. Refer the figure below and explain what happens in each graph (A, B, and C) when an economy is moving from a recession (point a) back to full employment.