The economy of Elmendyn contains 3,000 $1 bills. If people hold all money as cur

Question

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

If people hold all money as currency, the quantity of money is.

If people hold all money as demand deposits and banks maintain 100 percent reserves, the quantity of money is.

If people hold equal amounts of currency and demand deposits and banks maintain 100 percent reserves, the quantity of money is.

If people hold all money as demand deposits and banks maintain a reserve ratio of 20 percent, the quantity of money is.

If people hold equal amounts of currency and demand deposits and banks maintain a reserve ratio of 20 percent, the quantity of money is.

Explanation / Answer

Ans)

If people hold all money as currency, the quantity of money is $3,000.

If people hold all money as demand deposits at banks with 100% reserves, the quantity of money is $3,000.

If people have $1,500 in currency and $1,500 in demand deposits, the quantity of money is $3,000.

If banks have a reserve ratio of 20%, the money multiplier is 1/.20 = 5. So if people hold all money as demand deposits, the quantity of money is 5 x $3,000 = $15,000.

Two equations must be satisfied:
C= D and 5 x ($3,000 – C) = D
Using the first equation in the second gives
5 x ($3,000 – D) = D
$15,000 – 5D= D
6D=15000
D=2500

C=2500

D=5*($3,000 – 2500)=2500

Total money supply=2500+2500=5000

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