PRINCIPLES OF MACROECONOMICS(LOOSELEAF)
7th Edition
ISBN: 9781260110920
Author: Frank
Publisher: MCG
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Question
Chapter 10, Problem 3P
(a)
To determine
Determine the deposits and money supply in the economy.
(b)
To determine
Determine the currency held by the public and bank reserves.
(c)
To determine
Determine the desired reserve deposit ratio.
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Assume the following:
i. The public holds no currency.
ii. The ratio of reserves to deposits (0) is 0.08.
iii. The demand for money is given by M° = $Y(0.85 – 3.6i).
The monetary base (H ) is $63 billion, and nominal income ($Y ) is $4.9 trillion.
In the absence of any currency holdings by the public, the demand for money (M°) is equivalent to the demand for checkable deposits, and the demand for
central bank money (H°) is equivalent to the demand for reserves.
Given the ratio of reserves to deposits (0 = 0.08), the supply of central bank money (H = $63 billion), and the fact that equilibrium prevails in both the market
for central bank money (H° = H) and the money market (M = M°), it can be deduced that the overall supply of money is $
as an integer.)
billion. (Enter your response
10
Suppose you are the only currency holder in an economy, and you have $220 in currency. What would the money supply be in the following scenarios? [Hint: Use the money multiplier for Fractional Reserve Banking]
[Blank 1] You put your $220 under your pillow[Blank 2] You put your $220 in a full reserve banking system[Blank 3] You put your $220 in a fractional reserve banking system where the reserve ratio is 10%[Blank 4] You put your $220 in a fractional reserve banking system where the reserve ratio is 17%
Chapter 10 Solutions
PRINCIPLES OF MACROECONOMICS(LOOSELEAF)
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