【正文】 eficit and also maintain aggregate demand during recessionary periods.e: Discuss the supplyside effects of fiscal policyThe SupplySide Effects of Fiscal Policy The main thrust of supplyside economics is that a reduction in marginal tax rates will give individuals and businesses the incentive to (1) invest and save, (2) work and increase their productivity in projects which provide taxable ine, and (3) reduce leisure time activities and participation in taxshelter programs. Or, in other words, a tax cut will increase the attractiveness of productive activities and reduce the attractiveness of less productive taxavoidance schemes and leisure activities. These behavioral changes will increase aggregate supply, increase output, decrease unemployment and reduce prices. Why do high tax rates tend to retard output? 1. They discourage work effort and reduce the productive efficiency of labor. 2. They adversely affect the rate of capital formation and the efficiency of its use. 3. They encourage individuals to substitute less desirable taxdeductible goods for more desirable nondeductibe goods. f: Explain the relationship among budget deficits, inflation, and real interest rates.Budget deficits and real interest rates: The crowding out model implies that deficits will increase the demand for loanable funds and thereby place upward pressure on the real rate of interest. The new classical model, however, implies that the higher expected future taxes will stimulate additional savings and thereby permit the government to expand its borrowing at an unchanged interest rate. The results of empirical studies on this question are mixed. If there is a relationship between budget deficits and interest rates it is very weak at best.Budget deficits, capital inflows, and net exports: The evidence supports the theory that crowding out occurs when foreign capital flows into the US, causing exports to fall and imports to rise.g: Explain how and why budget deficits and trade deficits tend to be linked.Some economists may argue that higher . interest rates will attract foreign investment funds, reducing the crowding out effect. This happens as foreign investors go to the foreign exchange markets to buy . dollars. Their buying demand drives up the value of the dollar. The resulting increase in the value of the dollar causes . exports to fall and imports into the . to increase. Thus, crowding out still occurs, yet it takes a different form. Instead of government borrowing crowding out demand for capital investment goods, demand for . dollars causes the dollar to appreciate causing . exports to decline and imports to increase.: Money and the Banking Systema: Identify and explain the three basic functions of money.The three basics functions of money:1. Medium of exchange money simplifies and reduces the cost of transactions 2. Unit of account money serves as a unit of measure by which the value of goods can be pared. 3. Store of value money enables value to be stored and transported. It is also a liquid asset, meaning that it can be easily converted into other goods. b: Define the money supply.M1 is the narrowest definition of money. The money supply is defined as currency in circulation (coins and paper), checkable deposits maintained in depository institutions, and travelers’ checks.?M2 equals M1 plus savings deposits and time deposits less than $100,000 held in depository institutions plus moneymarket mutual fund shares.?Credit cards versus money: Money is a financial asset that provides the holder with future purchasing power while credit is a liability acquired when one borrows funds. Credit is not purchasing power but rather a facilitator of purchasing power.?Changes in the nature of M1 and M2: Since the 1980s, interestearning checking accounts have grown to approximately onefourth of the M1 money supply. Because savings and interest earning checking accounts are both part of M2, analysts now rely more on M2 when paring the money supply across time periods.c: Describe the fractional reserve banking system.Excess reserves are deposits at Fed banks in excess of the required amount. If a bank holds excess reserves, it can loan these monies to customers. When a bank makes a loan, the borrower spends the money. The sellers of goods who received the cash deposit these funds in their banks. This action creates additional loanable funds because only a fractional amount is required by law to be held as reserves. This process of lending, spending and depositing continues until the amount of excess reserves available for lending is zero. Therefore, the amount of money created by the original amount of excess reserves is a multiple of the excess reserves. This is the deposit expansion multiplier and is equal to the reciprocal of the required reserve ratio or the inverse of the proportion of each dollar in deposits required to be on deposit at the Federal Reserve System.The lower the reserve requirement percentage, the greater the potential money supply expansion that will result from the creation of new reserves. The fractional reserve requirement places a ceiling on potential money creation from new reserves.d: Explain the relationship among the required reserve ratio, potential deposit expansion multiplier, and actual deposit expansion multiplier.The “potential” deposit expansion multiplier will be reduced if some people decide to hold currency rather than deposit it into the bank. Also, the “actual” deposit expansion multiplier may be less than expected if banks refuse to loan out excess reserves. It is important to note that money is created only when banks make loans. A single bank can only lend out its excess reserves. It is the banking system as a whole that expands the money supply.e: Explain how a central bank can use monetary tools to implement monetary policy.The Fed sets the required reserve ratio. As the required reserve ratio drops, each dollar of e