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
