Homework Answers
1. The components of AD are consumption (C), investment (I), government spending (G) and net exports (X-M), i.e, AD=C+I+G+(X-M)
Now, a rightward shift from AD1 to AD2 implies an increase in AD. This can be caused due to increase in one or more of the components of AD.
So, the correct answer is:
a) an increase in investment spending.
Options (b) and (c) implies a change in aggregate supply but we do not have sufficient evidence to say that a change in aggregate supply would cause the AD to change. Also, a change in AS might be accompanied by a change in price so that AD does not change. so, these options do not give out clear reasons for a chane in AD. Option (d) suggests a decrease in net export spending which implies a decrease in AD. so, this cannot lead to a shift from AD1 to AD0.
2. the correct answer is:
A) a bank can only grant loans to customers if it has excess reserves.
Total reserves of a bank = required reserves + excess reserves.
Required reserves is the amount of money that the bank is required to hold at any point of time in order to meet any liabilities in times of sudden cash withdrawal. So, it can only lend out it's excess reserves as loans to it's customers.
Option (b) is incorrect because when borrowers repay bank loans, the money gets transferred from the borrowers to the bank and no new money is created in the process. So, the money supply does not change.
similarly, option (c) is incorrect because when borrowers take out loans, the money only gets transferred from the bank to the borrowers and no new money is created in the process. So, the money supply does not change.
option (d) is incorrect because as mentioned for the first option, a bank can legally lend an amount equal to its excess reserves and not total reserves.
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