Questions and Problems


Questionsand Problems



Thefinancial system is exceedingly critical and plays the role ofdirecting the resources of households that desire to save some oftheir income into the hands of households and firms that want toborrow. In short, the financial system helps in facilitatingborrowing as well as saving of resources. Examples of financialintermediaries include banks and stock exchange companies. Banks helpindividuals to save as well as borrow resources while stock exchangecompanies aid people in investing resources.


Thebureau of labor statistics categorizes individuals as employed,unemployed, or not in the labor force. The labor force comprises ofthe sum of unemployed individuals and employed individuals. Theunemployed rate entails the percentage of the labor force which isunemployed. On the other hand, the labor force participation rateentails the percentage of the total adult population which is in thelabor force.



Moneysupply cannot be controlled perfectly by the Fed because the Fedcannot control the amount which bankers choose to lend. It is theactions of households and banks that affect the money supply in wayswhich the Fed cannot perfectly control or even predict. Also, the Feddoes not control the amount of money which the households choose tohold as deposits in the banks. Thus, it is difficult for the Fed tocontrol the supply of money.


Themoney multiplier is 1/0.1 = 10

Thus,the money supply is 100*10 = 1000 billion.

Incase the Fed raises reserve requirement reserves will remainunchanged and the money multiplier will fall to 5. On the other hand,the money supply will fall to $500 billion


Arnold,R. A. (2008). Economics.Mason, OH, USA: Thomson South-Western.