Question

The economy of Elmendyn contains 2,000 $1 bills. a.If people hold all money as currency, the quantity of money is $ . b.If people hold all money as demand deposits and banks maintain 100 percent reserves, the quantity of money is $ . c.If people hold equal amounts of currency and demand deposits and banks maintain 100 percent reserves, the quantity of money is $ . d.If people hold all money as demand deposits and banks maintain a reserve ratio of 25 percent, the quantity of money is $ . e.If people hold equal amounts of currency and demand deposits and banks maintain a reserve ratio of 25 percent, the quantity of money is $ .

Answer 1

Answer:

(a) $2,000

(b) $2,000

(c) $2,000

(d) $8,000

(e) $3,200

Explanation:

Given that,

Number of bills = 2,000

Worth of each bill = $1

(a) If people hold all money as currency, then the quantity of money is determined as follows:

= Number of bills × Worth of each bill

= 2,000 × $1

= $2,000

(b) If people hold all money as demand deposits and banks maintain 100 percent reserves,

Money multiplier = 1/ Reserve requirement ratio

                            = 1/1

                            = 1

Quantity of money:

= Money multiplier × Demand deposits

= 1 × $2,000

= $2,000

(c) If people hold equal amounts of currency and demand deposits and banks maintain 100 percent reserves,

Therefore,

Currency = $1,000

Demand deposits = $1,000

Quantity of Money:

= Currency with public + Demand deposits

= $1,000 + $1,00

= $2,000

(d) If people hold all money as demand deposits and banks maintain 25 percent reserves,

Money multiplier = 1/ Reserve requirement ratio

                            = 1/0.25

                            = 4

Quantity of money:

= Money multiplier × Demand deposits

= 4 × $2,000

= $8,000

(e) If people hold equal amounts of currency and demand deposits and banks maintain 25 percent reserves,

Now, we know that

Currency = Demand deposits .....(1)

Banks maintain 25 percent reserves,

4 × ($2,000 - Currency) = Demand deposits

4 × ($2,000 - Demand deposits) = Demand deposits

$8,000 = 5 Demand deposits

$1,600 = Demand deposits

Therefore, the currency = $1,600

Quantity of money:

= Currency + Demand deposits

= $1,600 + $1,600

= $3,200