2. Suppose you are the only currency holder in an economy, and you have $100 in

Question

2. Suppose you are the only currency holder in an economy, and you have $100 in currency. What would M1 be in the following scenarios? a.You put your $100 under your pillow b. You put your $100 in a full reserve banking system c. You put your $100 in a fractional reserve banking system where the reserve ratio is 20% d.You put your $100 in a fractional reserve banking system where the reserve ratio is 10% 3. During the 2008-2009 Recession, there was a shortage of loanable funds, that is banks were not loaning out money. What action could the Federal Reserve have taken to help get out of the recession? (Hint: It involves the reserve ratio)

Explanation / Answer

2) a) Money supply will remain at $100

B) money supply M1 will remain at $100 because 100% of money is backed up or held with banks

C)when reserve ratio is 20% it means money multiplier=1/r=1/02=5 thus Money supply M1=500

D)when reserve ratio is 10% then money multiplier=1/0.1=10. Thus money supply M1=1000

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