- Explain the statement" The most unlikely problem of the national debt is that the government will go bankrupt."
- Consider the statement: "Our Grandchildren may not suffer the entire burden of a federal deficit." (What is this like a trick question?) Is this true or false?
- Distinguish M1, M2, and M3. What are near monies?
- If you deposit a 20,000 dollar check into a checking account and your bank has a three percent reserve requirement, by houw much will the bank's excess rise? Consider the money multiplier. What is the maximum increase in money supply?
Do a little research, then take a shot. What do you think.
hint 1: what can (federal) governments do than ordinary citizens cannot do? And who imposes sanctions on people who default on their loans.
hint 2: is there government spending that benefits people now as well as in the future.
I already assessed the first question. Although I would appreciate some assistance on the second and third one. No matter what I research the questions myself all I'm really looking for is a point in the right direction.
Thanks
Q2 There is a notion of deficit spending that benefits of the money spent today go entirely to the current generation; however future generations get stuck with the bill.
However, one could argue that some spending done today makes the future look brighter. For example, money spent on infrastructure such as highways leads to economic growth which leads to a more prosperous existence for future generations. Also, are we a rich prosperous nation today because of the huge deficit spending made in WWII.
Q3) Wikipedia has a brief but probably adequate description. Google Money Supply Definitions.
Q4) With a 20K deposit, the bank needs to keep 3% ($600) in reserve. Excess reserves, which it can loan out is the rest. The money multiplier (which gives the maximum expansion) is 1/rr = 1/.03 = 33.333
. So the maximum increase in money supply is 20K x 33.333 = 666,660.
- The statement "The most unlikely problem of the national debt is that the government will go bankrupt" suggests that government bankruptcy is not a significant concern when it comes to the national debt. This is because unlike individuals or businesses, the government has the ability to take certain actions to address its debt, such as printing more money or raising taxes. Additionally, governments can also borrow funds from other countries or international organizations. Therefore, while the national debt may present challenges and have implications for the economy, it is unlikely to result in government bankruptcy.
- The statement "Our Grandchildren may not suffer the entire burden of a federal deficit" is true. This statement recognizes that deficit spending today may have positive impacts on the future. For example, investments in infrastructure or education can lead to economic growth and improved living standards in the long run. Additionally, economic growth can generate higher tax revenues, which can help offset the impact of the deficit. Therefore, while future generations may still bear some burden of the federal deficit, it is possible that they may also benefit from the positive consequences of today's spending.
- M1, M2, and M3 are different measures of the money supply.
1. M1: It includes currency held by the public, demand deposits (checkable deposits) held by individuals and businesses, and other liquid assets that can be used for transactional purposes.
2. M2: It includes M1 plus savings deposits, time deposits, and certain money market funds. M2 represents a broader measure of money that includes assets that are less liquid than those in M1 but still readily accessible.
3. M3: It includes M2 plus large time deposits, institutional money market funds, and certain other less liquid financial assets.
Near monies refer to financial assets that are not considered part of the official money supply (M1, M2, or M3) but still have some characteristics of money. These assets may be easily converted into liquid money and include items such as savings bonds, treasury bills, and money market funds.
- In the given scenario, if you deposit a $20,000 check into a checking account and the bank has a three percent reserve requirement, the bank will need to keep $600 ($20,000 * 0.03) as reserves. The remaining $19,400 will be considered excess reserves that the bank can lend out.
Considering the money multiplier, which is the reciprocal of the reserve requirement, the maximum increase in the money supply can be calculated as follows:
Money multiplier = 1/reserve requirement = 1/0.03 = 33.333...
Maximum Increase in Money Supply = Excess Reserves * Money Multiplier
= $19,400 * 33.333...
≈ $646,665.67
Therefore, the bank's excess reserves will rise by $19,400, and the maximum increase in the money supply will be approximately $646,665.67.
Q2) The statement "Our grandchildren may not suffer the entire burden of a federal deficit" is a complex issue that can be seen from different perspectives. It is not a trick question, but rather a point of discussion and debate.
Some argue that deficit spending, where the government spends more than it collects in revenue, can have positive effects in the short term by boosting economic growth and creating jobs. This can benefit the current generation by stimulating the economy and providing immediate improvements in living standards. However, future generations may have to bear the long-term consequences of the deficit, such as higher taxes or reduced government services, to pay off the debt accumulated.
On the other hand, proponents of deficit spending argue that certain investments made today, such as infrastructure development or education, can have long-lasting positive effects on the economy and society as a whole. These investments may lead to increased productivity and economic growth, which can benefit future generations. Therefore, they argue that the burden of the deficit may not fall entirely on future generations, as they could also reap the benefits of the investments made today.
Ultimately, whether this statement is true or false depends on various factors, including the specific context, the effectiveness of the spending, and the ability of future generations to address the debt.
Q3) M1, M2, and M3 are different measures of the money supply in an economy.
- M1 includes physical currency (coins and notes) in circulation, demand deposits (checking accounts), and some traveler's checks. It represents the most liquid forms of money and is often used as a measure of narrow money supply.
- M2 includes all the components of M1 and adds certain types of savings deposits, money market accounts, and retail money market mutual fund shares. It represents a broader definition of money supply, including more liquid assets that can be easily converted into cash.
- M3 includes M2 and includes even broader measures of money supply, such as large-term deposits, institutional money market funds, and other forms of financial assets. M3 is less commonly used as a measure of money supply and is more focused on broader financial aggregates.
Near monies are financial assets that are not considered part of the official money supply but are highly liquid and can serve as substitutes for money. These include things such as savings accounts, money market funds, and short-term government securities. While near monies can be readily converted into cash, they are not considered part of the official money supply because they are not used for day-to-day transactions like physical currency or demand deposits.
Q4) To determine the excess reserves and the maximum increase in the money supply, you can use the concept of the money multiplier. The money multiplier represents the amount by which the money supply can potentially expand based on a given reserve requirement.
In this case, if you deposit a $20,000 check into a checking account and your bank has a three percent reserve requirement, the bank will need to keep 3% of the deposit as reserves, which is $600. The remaining amount, $19,400, represents the excess reserves that the bank can loan out.
To calculate the maximum increase in the money supply, you can use the money multiplier formula, which is the reciprocal of the reserve requirement.
Money multiplier = 1 / reserve requirement
In this case, the reserve requirement is 3%, so the money multiplier would be 1 / 0.03 = 33.333.
To determine the maximum increase in the money supply, you can multiply the excess reserves ($19,400) by the money multiplier:
Maximum increase in money supply = excess reserves * money multiplier
= $19,400 * 33.333
≈ $646,666.67
Therefore, the maximum increase in the money supply would be approximately $646,666.67.