The Fed controls bank lending and thus the process of money ...

[jCorn1234]

The Fed controls bank lending and thus the process of money creation through its power to
 
  A) alter legal reserve requirements and the dollar amount of reserves.
  B) establish maximum and minimum interest rates on bank loans and deposits made with banks.
  C) oversee the lending criteria banks use.
  D) suspend the charter of banks whose lending activities contribute to an excessive rate of increase in the money supply.

Question 2

Suppose there are two market structures: A and B. Market A is characterized by free entry and exit of firms and firms under this structure face a horizontal demand curve. Market B has only one seller. Identify the market structures.
 
  Comment on the pricing mechanism, long-run profitability, and social surplus under both market structures.

[Ahnyah]

Answer to Question 1

A

Answer to Question 2

Firms in Market A face a horizontal demand curve. This implies that the market demand is perfectly elastic and all firms will be price takers. Hence, Market A is a perfectly competitive market.

Market B has only one seller. A market where there is a single seller is a monopoly. Hence, Market B is a monopoly.

Pricing: Firms in Market A will price their products at the marginal cost corresponding to the output sold. The seller in Market B will price its product higher than the marginal cost corresponding to the output sold.

Long-run profitability: Firms in Market A will earn zero profits in the long run, whereas the seller in Market B can earn positive economic profits in the long run.

Social surplus: Social surplus is maximized in Market A, whereas social surplus is not maximized in Market B.