Question

The economy of Elmendyn contains 900 $1 bills. If people hold all money as currency, the quantity of money is $ . If people hold all money as demand deposits and banks maintain 100 percent reserves, the quantity of money is $ . If people hold equal amounts of currency and demand deposits and banks maintain 100 percent reserves, the quantity of money is $ . If people hold all money as demand deposits and banks maintain a reserve ratio of 12.5 percent, the quantity of money is $ . If people hold equal amounts of currency and demand deposits and banks maintain a reserve ratio of 12.5 percent, the quantity of money is $ .

Answer 1

Answer:

a)    900 dollar as all is M0

b)    900 as the deposit have no multiplier effect

c)    900 as there is no multiplier effect

d) 7,200 taking into consideration the multipler effect from the bank deposit.

e) 4,050 considering the deposit multiplier effect

Explanation:

a; b ; c ) as there is no multiplier effect the quantity of money matches the nominal currency.

d)

M0 (currency and coins) 0

M1 900 / 0.125 =  7,200

e)

currency : 900 / 2 = 450 M0

deposit :

450 / 0.125 = 3,600 M1

Total 4,050