7) Assume this in a closed economy $800 S640 S80 S120 Consumption Government Rev

Question

7) Assume this in a closed economy $800 S640 S80 S120 Consumption Government Revenue A. What are investment and savings? overnment Expenditure Investment Savings B. Show the relevant algebra and the calculations that you used for each one 8) Assume the following data are for an economy; a) What is the quantity of money in circulation? demand deposits held by the public Yield on Moody's AAA Number of commercial banks Legal reserve requirements Total reserves of commercial banks Cash held by the public Total Loans of commercial banks Total Equitv/capital of commercial banks $4000 2.0% 1352 13% S480 $1104 S3560 b) What is the quantity of high powered money or the monetary base? c) What are two potential problems for this S40 economy? d) What actions can the banks take that will reduce the probability of these problems creating a financial crisis?

Explanation / Answer

(7) (A) and (B)

(i) Investment = Output - Consumption - Government expenditure = $(800 - 640 - 120) = $40

(ii) National saving = Private savings + Public savings

Private saving = Output - Consumption = $(800 - 640) = $160

Public saving = Government revenue - Government expenditure = $(80 - 120) = - $40

National saving = $160 - $40 = $120

NOTE: As per Chegg answering guideline, 1st question is answered.

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