The economy of Elmendyn contains 2,000 $1 bills. If people hold all money as cur

Question

The economy of Elmendyn contains 2,000 $1 bills. If people hold all money as currency, what is the money supply? If people hold all money as demand deposits and banks maintain 100 percent reserves, what is the quantity of money? If people hold equal amounts of currency and demand deposits and banks maintain 100 percent reserves, what is the quantity of money? If people hold all money as demand deposits and banks maintain a reserve ratio of 10 percent, what is the quantity of money? If the reserve ration is 20 percent, what then is the money supply? If people hold equal amounts of currency and demand deposits and banks maintain a reserve ratio of 10 percent, what is the quantity of money?

Explanation / Answer

1. Money supply would be $2000. because all the money is in the economy.

2. Money supply would be 0. because all the money is available at demand i.e. whenever required.

3. Money supply would be $1000.

4. With 10% reserve ratio, 90% of 2000 is available as loans. Therefore money supply will be $1800. If the ratio is 20% then the money supply would be 80% of 2000 i.e. $1600.

5. $1000 is already there in the economy, and out of other $1000, 90% is available for funding. Therefore money supply = $1000 + $900 = $1900

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