Economics-monetary policy?
a) If people hold all money as currency, what is the quantity of money?
b) If people hold all money as demand deposits and banks maintian 100 % reserves, what is the quantity of money?
c) If people hold equal amounts of currency and demand deposits and banks maintain 100% reserves, what is the quantity of money?
d)If people hold all money as demand depositis and banks maintain a reserve ratio of 10%, what is the quantity of money?
e)If people hold equal amounts of currency and demand deposits and banks maintain 10% reserves, what is the quantity of money?
Answer:
For any bank holdings you use need to find the max potential of money supply by using this formula
Max Potential ΔMs = ΔTotal Reserves x (1/ Required Reserve Ratio)
If people hold it just count it as is.
a) $2000
b)
Max Potential ΔMs = 2000 * 1/1
= $2000
c)
Max Potential ΔMs =1000 + 1000 * 1/.1
= $2000
d)
Max Potential ΔMs = 2000 * 1/.1
= $2000
e) Max Potential ΔMs =1000 + (1000* (1/.1)
= 1000 + 10000
=11000
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