【正文】 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. Corporate profit taxes, s additional ine ($1,000 x MPC). They will spend some [($1,000 x MPC) x MPC] and save the rest. This process continues indefinitely. You can see that the original $1,000 of ine expands or is multiplied into more than $1,000 of total ine for the economy.The amount of the expansion is called the expenditures multiplier and is equal to: M = 1/(1 MPC)Therefore, if investment spending increases by $1,000, total spending will increase by M x $1,000.The multiplier shows why small changes in C, I, or G can cause large changes in output. This is the key to the multiplier concept.f: Discuss the Keynesian view of the business cycle.Assume there is an increase in aggregate demand (perhaps from higher ines abroad or an increase in consumer or business optimism). The multiplier magnifies the increased demand. The higher demand leads to ine growth. The ine growth leads to additional consumption and growing business sales. This leads to declining inventories, so businesses expand their output. Unemployment declines and the economy experiences a boom. Eventually, the economy reaches full employment, which constrains additional growth. As growth slows, consumers and businesses bee less optimistic and cut back on their expenditures. The multiplier magnifies the reduced expenditures. Business inventories begin to build, and so businesses cut back on production and people are laid off. Some businesses begin to experience bankruptcy.Keynes thought that the primary problem was wide fluctuations in private investment. He also thought that recessions would be long because lower interest rates and falling resource prices are sufficient to offset the decline in ines and spending.: Fiscal Policya: Explain the process by which fiscal policy affects aggregate demand and aggregate supply.The Keynesian argument remends increased spending to push the economy back to full employment. Expansionary fiscal policy is precisely this kind of increased spending. Either reducing taxes or increasing spending will expand the budget deficit. Weak demand (AD1) causes an output level of GDP1 and a price level of P1. Expansionary fiscal policy bypasses the traditional adjustment path and increases demand from AD1 to AD2. The result would be increased output (GDPf) and higher prices (P2).Restrictive fiscal policy works in the opposite way. The result of restrictive fiscal policy is lower prices and reduced output. Countercyclical policy is a bination of expansionary and restrictive fiscal policy designed to smooth output fluctuations brought on by the business cycle. For example, in the Keynesian world, if the economy is in a recession, a planned budget deficit is enacted. Conversely, if the economy is operating above full employment (boom), a planned budget surplus is enacted.b: Explain the importance of the timing of changes in fiscal policy and the difficulties in achieving proper timing.There is usually a time lag between when a change in policy is needed and when policy makers recognize its need. Furthermore, there is an additional lag between when the need is recognized and when it is instituted. Finally, there is a lag between when the policy is adopted and when its impact is felt. Therefore, the use of fiscal policy to calm the business cycle is very difficult. Some economists believe that the business cycle is exacerbated by planned fiscal policy shifts, not calmed by it. This occurs when lags in fiscal policy cause it to accentuate the natural corrective action of the economy rather than correct the problem the policy was intended for.c: Discuss the impact of expansionary and restrictive fiscal policies based on the basic Keynesian model, the crowdingout model, the new classical model, and supplyside effects.Basic Keynesian model: An increase in government spending and/or reduction in taxes will be magnified by the multiplier process and lead to a substantial increase in aggregate demand. This will stimulate the economy leading to increases in the level of emplo