Question

The economy of Elmendyn contains 3,000 $1 bills.

Answer 1

Answer:

The correct answer is:

$3,000; $3,000; $3,000; $15,000; $5,454.54

Explanation:

An economy contains 3,000 bills of $1.

If people hold all the money as currency,

the quantity of money in the economy

= 3,000 $\times$ $1

= $3,000

If people hold all money as demand deposits and maintain 100% reserves

The quantity of money is

= 100% of $3,000

= $3,000

If people hold equal amounts of currency and demand deposits, and the banks maintain a reserve ratio of 100%

The quantity of money

= $1,500 + 100% of $1,500

= $3,000

If people hold all money as demand deposits and banks maintain a reserve ratio of 20 percent

The money multiplier

= $\frac{1}{0.2}$

= 5

The quantity of money

= 5 $\times$ $3,000

= $15,000

If people hold equal amounts of currency and demand deposits and maintain a reserve ratio of 20%,

Currency = Demand deposits

10 $\times$ ($3,000 - C) = D

$30,000 - 10C = D

We can also write this as,

$30,000 - 10D = D

$30,000 = 11D

D = 2,727.27

So the quantity of money will be

= $2,727.27 + $2,727.27

= $5,454.54