Question

Consider the following situations: a. Bank reserves are $250, the public holds $200 in currency, and the desired reserve-deposit ratio is 0.25. Find deposits and the money supply. Instructions: Enter your responses as whole numbers. Deposits: $ . Money supply: $ . b. The money supply is $600 and currency held by the public equals bank reserves. The desired reserve-deposit ratio is 0.25. Find currency held by the public and bank reserves. Instructions: Enter your responses as whole numbers. Currency held by the public: $ . Bank reserves: $ . c. The money supply is $1,400, of which $500 is currency held by the public. Bank reserves are $90. Find the desired reserve-deposit ratio. Instructions: Enter your response rounded to two decimal places. Desired reserve-deposit ratio: .

Answer 1

Solution:

a) Deposits= Bank Reserves/ (Reserve-deposit ratio)

                 = $250 / 0.25 = $1,000

Money supply =Currency held by the public+ Deposits

                        = $200 + $1,000 = $1,200

b) The savings and currency of the country are equivalent in this case. Its worth should be equal to x and deposits should have money supply less currency.

r = reserves/total deposits

0.25 = x / ($600 - x)

x = 150 - 0.25x

1.25 x =150

x =120

So, the currency held by public is $120

Bank reserves are $120  

c) As the money supply is $1,400 and the public holds $500 in currency, bank deposits must equal $900  

If bank reserves are $90,

the desired reserve/deposit ratio equals $90/$900 = 0.1