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Can you answer these discussion questions? 1. Why does the Federal Reserve require commercial banks to have reserves? Explain why reserves are an asset to
Can you answer these discussion questions? 1. Why does the Federal Reserve require commercial banks to have reserves? Explain why reserves are an asset to commercial banks but a liability to the Federal Reserve Banks. What are excess reserves? How do you calculate the amount of excess reserves held by a bank? What is the significance of excess reserves? 2. Explain why a single commercial bank can safely lend only an amount equal to its excess reserves but the commercial banking system as a whole can lend by a multiple of its excess reserves. What is the monetary multiplier, and how does it relate to the reserve ratio? 3. Distinguish between the Federal funds rate and the prime interest rate. Why is one higher than the other? Why do changes in the two rates closely track one another 4. What do economists mean when they say that monetary policy can exhibit cyclical asymmetry? How does the idea of a liquidity trap relate to cyclical asymmetry? Why is this possibility of a liquidity trap significant to policymakers? 5. Suppose the government misjudges the natural rate of unemployment to be much lower than it actually is, and thus undertakes expansionary fiscal and monetary policies to try to achieve the lower rate. Use the concept of the short-run Phillips Curve to explain why these policies might at first succeed. Use the concept of the long-run Phillips Curve to explain the long-run outcome of these policies. 6. What is the Laffer curve, and how does it relate to supply-side economics? Why is determining the economy's location on the curve so important in assessing tax policy
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