Question

1. what would a larger or smaller multiplier effect suggest about the severity of recessions?

2. why would banks try to avoid holding tok many reserves in excess?

3. what is "normal capacity" of capital utilization?

Answer 1

1.The larger the multiplier the larger the effect of recession,the smaller the multiplier the lesser the effect of multiplier.

2.If banks hold too much reserves then the money supply would fall in the economy.As a result interest rate will rise and aggregate demand would fall.

3.Normal capacity is driven by business demand, not by maximum capacity. It takes the seasonal and cyclical demand cycle into consideration and is usually estimated over a two- to three-year period.