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- Explain in your own words the process by which banks “create” money. What is the reserve requirement and what role does it play in money creation?
- Discuss the impact of that ability to create money on the economy during an inflationary gap and during a recessionary gap. Considering the higher rates of unemployment and the likelihood of lower prices during a recessionary gap, do banks, with their lending policies, contribute to a recovery?
- The only thing backing up a nation’s currency (fiat money) in the modern world is faith in the government issuing it. If this is so, what should governments do to maintain a stable currency? How can the Central Bank (the Federal Reserve) build trust in the currency? What actions would undermine a currency?
