Reserves of a bank is much less in comparison with the bank’s total deposit debts. This may seem very dangerous to you. If you had money in a bank, maybe you would wish to withdraw and deposit it to another bank whose reserves are equal to its debts in form of deposits. Unfortunately, this would be not possible. Likewise, all banks hold an amount of cash less than their deposit debts as reserves. This operating method is named as fractional reserve banking. Fractional reserve banking can be defined as a banking system in which banks hold an amount of money less than their deposit debts as reserve.

The productive capacity includes the factors of production (the physical capital, labor and natural resources) and the production technology. The factors of production are the physical capital (K), labor (L), natural resources (raw materials, land, energy, etc.) and the entrepreneurship. These are also called the inputs of the production.

As there is no possibility of barter in a modern economy, economic units (i.e., households, corporations, government and foreigners) need money to perform their daily operations. Likewise, money, as a medium of exchange, makes it easy for economic units to perform these operations. The amount of money that economic units want to hold to spend for goods and services is called as transaction demand for money.

There are different approaches among economists regarding the shape of the short-run aggregate supply curve, in other words, the slope of the short-run aggregate supply curve. Classical economists argue that the short-run supply curve is completely vertical or rather steep because the economy is always at full of employment as a result of dynamics of the market mechanism. According to this view, since the economy is in full employment, it is not possible to increase the total output even in the short-run. Keynesian economists argue that the supply curve is horizontal because the economy is underemployment GDP level. According to this view, it is possible to increase the total production without changing the general price level. When the economy moves from underemployment to full employment due to the increase in production, the general price level will start to rise.

Since contractionary fiscal policy means decreasing government expenditures and increasing taxes, AD curve has to shift downward as indicated by the choice A.

Money is not a complement to barter, yet it serves as a mediım of exchange, a unit of account and a store of value.

Price stability is the situation in which the general price level in the economy either changes very slowly or does not change at all.

There are a number of criticisms against the use of HDI to represent the economic development, including:

1. The HDI index does not distinguish between different rates of development within a country such as between urban and traditional rural communities.

2. Giving equal weight to the three main components is rather arbitrary.

3. Development is largely about freedom, but the index does not directly measure this.

4. It uses GDP per capita, but there is no indication of the distribution of income in the country.

5. The HDI excludes many aspects of economic and social life that could be regarded as contributing to or constraining development, such as crime, corruption, poverty, deprivation, and negative externalities.

External Equilibrium refers to the balance of payments equilibrium.

One of the most important studies of economic history is General Theory of Employment, Interest and Money written by John Maynard Keynes in 1936. Keynes has developed an economic theory for explaining complex economic events by using the information about markets and behaviors in these markets. Therefore, the origins of macroeconomics are widely based on Keynes’ book and theoretical breakthrough attributed to him is often called as the “Keynesian Revolution”. Keynes refused the idea that the employment was determined by prices and wages as put forward by classical models and developed the opinion that the aggregate demand for goods and services produced in the economy was the main factor determining the employment.

The Assumptions of the Solow Growth Model

• The economy consists of one sector producing one good which is used for either investment or consumption,
• It is closed economy without government,
• Since the economy is a closed one, then the saving is equal to investment,
• The economy is always producing its potential which is the full employment level of output,
• In the model, the rate of technological growth, population growth and the

depreciation rate of capital is all determined exogenously.

While expansionary fiscal policy creates initial price increase, the accommodating monetary policy causes prices to increase gain and again (continuously). Therefore, we can conclude that inflation occurs only with continuously increasing supply of money. This confirms the idea that inflation is always a monetary phenomenon.

Terms of trade is the ratio of the export price index of a county to its import price index.

Aggregate demand is the total amount of goods and services demanded at various price levels in an economy.

Inflation caused by increasing aggregate demand is called as demand-pull inflation.

Price stability is the situation in which the general price level in the economy either changes very slowly or does not change at all.

Correct answer is D.

The possibility and speed of conversion for these type of assets to currency or demand deposit is called as liquidity. Considering the full liquidity of money, many financial assets may have this property more or less, even not exactly. When considering the liquidity property, it is not easy to distinguish monetary things and non-monetary things. This kind of assets having a high liquidity but not used in payments directly are called as near (or quasi) monies.

Golden Rule capital labor ratio refers to the level of the capital labor ratio that maximizes the consumption per worker in the steady state.

The functions of Central Bank are as follows:

Ensuring and maintaining Stability in Money Markets

Serving as the Banker for Banks and serving as the    Lender of Last Resort

Performing Banking Transactions of the Government