Question

An economy has a monetary base of 1,000 $1 bills. calculate the money supply in scenarios a - d. then answer part e.

Answer 1

a) If all money is held as currency, the money supply is $1,000.

b) If banks hold 100% of deposits as reserves, the money supply is $0.

c) If all money is held as demand deposits, the money supply is $1,000.

d) If banks hold 20% of deposits as reserves, the money supply is $5,000.

e) If the central bank decides to increase the money supply by 10%, the money supply is $1,100.

What is the money supply?

The money supply is the total amount of a nation's currency circulating in the economy at a specific time.

The money supply is made up currency in the hands of the public and demand deposits in financial institutions.

Data and Calculations:

Monetary base = 1,000 of $1 bills

a) If all money is held as currency, the money supply is $1,000 ($1 x 1,000).

b) If banks hold 100% of deposits as reserves, the money supply is $0.

c) If all money is held as demand deposits, the money supply is $1,000 ($1,000 + 0).

d) If banks hold 20% of deposits as reserves, the money supply is $5,000 ($1,000/20%).

e) If the central bank decides to increase the money supply by 10%, the money supply is $1,100 ($1,000 x 1.1).

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Question Completion:

a. All money is held as currency

b. Banks hold 100 percent of deposits as reserves.

c. All money is held as demand deposits.

d. Banks hold 20 percent of deposits as reserves.

e. The central bank decides to increase the money supply by 10 percent.