Author Question: Why does the holding of excess reserves by banks and the holding of currency by households and firms ... (Read 114 times)

Yi-Chen · **on:** Jun 29, 2018

Why does the holding of excess reserves by banks and the holding of currency by households and firms cause the real-world deposit multiplier to be less than the simple deposit multiplier?

What will be an ideal response?

Question 2

Refer to Table 11-7. Consider the statistics in the table above in describing the following industrialized and developing countries. Are these consistent with the economic growth model? Briefly explain.

What will be an ideal response?

fatboyy09 · **Reply #1 on:** Jun 29, 2018

Answer to Question 1

If banks hold excess reserves, these reserves are not loaned out. The corresponding checking account deposits are not created and neither are the additional checking account deposits from other banks that would have been created through the deposit multiplier process.
If households and firms hold currency, then banks do not get the deposits and the corresponding reserves. If the currency was deposited, the banks would create a multiple expansion of checking account deposits through the multiplier process.

Answer to Question 2

These statistics combine industrialized countries with developing countries. The statistics in this table are not consistent with the predictions of the economic growth model. For example, Belgium, France, Canada and Denmark had much higher levels of real GDP per capita in 1960 than did Bangladesh, Honduras, and Bolivia. The economic growth model predicts that Belgium, France, Canada, and Denmark should have grown more slowly than Bangladesh, Honduras, and Bolivia. But the table shows that they grew much faster.