# How will crypto help in management of output gap? (Explained in the post ahead)

Hello all,

I was doing my macroeconomics revision, where I deal with theories of reducing the demand gap of an economy.

I will now explain all in the below part:

What is the output gap:

It is the difference between aggregated demand(AD) and aggregated supply (AS).

If AD>AS, then there is inflation( Something this sub hates, increase in price)

If AD<AS then there is deflation(price decrease).

In general, we can’t completely fix unemployment, it will exist despite the best policies.

The unemployment that exists when AD=AS, is called the Natural rate of employment.

The job of a government is to try its best to make sure AD=AS, which, as my dream to get a 100 on my test, is impossible and it will at best be close to being equal.

As much as I hate banks and government, credit where it’s due, both have a crucial role in reducing the output.

Now EXPLAINING:

Keynesian school of thought:

When the markets are in recession, Government must spend money to revive the economy.

In recessions, the AD decreases, causing deflation. Keynes explain the concept of MPC and Money Multiplier.

MPC: Marginal Propensity to Consume

It means for every \$100, how much will I spend/invest.

MPS: Marginal Propensity to Save

It means for every \$100, how much will I save.

MPS + MPC = 1

For simplification’s sake, let’s assume it to be 0.5.

That is, for every \$100 I get additionally, I spend \$50 of that 100, and save the rest,

( Personal finance advice, make sure that you invest 50% of your additional revenue, 20% on wants and 30% on needs. Anyways)

The government starts a project of building a bridge for \$100 million. Now it will hire workers, rent hostels etc.

So here, the government’s expense is these workers’ income.

Now, these workers have an additional 100 million with them, and as we saw that MPC is 0.5,

50 Million will be spent by them, say to buy clothes.

Now, these clothing shops have an additional income of 50 million, and they spend 25 million of that.

This cycle continues till MPS= initial investment of 100 million.

Now, the economy has 200 million, which can be calculated by this formula:

= 1/(MPS)

1/(0.5)

= 2

&#x200B;

|:-|:-|:-|
|1|100|50|
|2|50|25|
|3|25|12.5|
|4|12.5|6.25|
|5|6.25|3.125|
|N th round|200|100|

Basically

One man’s expense is another’s income

Now let’s talk about another thing this sub loves: BANKS.

Banks work similarly, but they use Cash Reserve Ratio (CRR) and Statutory liquidity ratio (SLR) instead of MPC.

Both are what the banks are supposed to have and maintain, they do it to make sure that there is enough liquidity in the bank. ( That is, in case we go get back our deposited money).

To simplify the process:

(CRR+SLR)= 0.2

meaning that for every \$100, banks can lend \$80 of it, and need to have \$20 as a safety deposit( In case anyone will come to collect it).

This is how it works

* It is assumed that all banks are one unit.
* All transactions happen via bank.

&#x200B;

|Deposit|CRR+SLR|Loan|New Deposit|
|:-|:-|:-|:-|
|100|20|80|80|
|80|16|64|64|
|64|12.8|51.2|51.2|
|51.2|10.24|40.96|40.96|
|n|100|400|500|

Now,

Central Bank can decide the CRR and SLR and they can control the demand.

How?

The relationship between CRR+SLR and Multiplier

= 1/(1-\[CRR+SLR\]).

Therefore, higher CRR and SLR are, lower the supply of money in the market as the lower amount of loans given in the market.

Now, the big question:

If we are in a recession, how will we use Crypto to revive the market as we don’t have an entity which has the most money( government) or loan adjuster (Central Bank)?

Especially as most cryptos are themselves not recession-proof?

I believe if we have the answer to this, mass adoption is easier.

Also, do reach out if you don’t understand anything.

Thank you,