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Government expenditures multiplier and the money multiplier

1. Discuss the conceptual similarities between the government expenditures multiplier and the money multiplier.

2. The yield curve reflects interest rates over different maturities for a given debt instrument, like 10-year treasury bonds, or 3-month treasury bills, as well as private debt. What can you conclude about an upward sloping yield curve? What if the yield curve becomes inverted (downward sloping)?

3. What does it mean if we have a "strong dollar" or a "weak dollar" in the context of exchange rates? Do you believe that the dollar is "strong" or "weak" at this time and how does this impact consumers, businesses, and the economy as a whole?

4. Explain why fiscal policy will be either more or less effective in an economy with a large foreign sector.

Solution Preview

1.The money multiplier causes a ripple effect through the economy when banks lend money. For example, if you deposit $100 in a bank, and its reserve ratio is 10%, it can loan out $90 to another person. Your $100 become $190. Then, that person may deposit the loan at another bank, which creates more money. The government expenditure multiplier works in a similar way. When the government spends, it purchases goods and services and hires workers. This generates income for businesses and individuals. They spend their income, up to the marginal propensity to consume, on other goods and services. The generation of income in this manner is through the governmentt expenditures, or fiscal, ...

Solution Summary

Contrast between the government expenditures multiplier and the money multiplier; yield curves; exchange rates and effectiveness of fiscal policy in countries with large foreign sectors.

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