In Westlandia, the public holds 50% of M1 in the form of currency, and the requi
ID: 1253232 • Letter: I
Question
In Westlandia, the public holds 50% of M1 in the form of currency, and the required reserve ratio is 20%.
1. Estimate how much the money supply will increase in response to a new cash deposit of $500 by completing the accompanying table.
(Hint: The first row shows that the bank must hold $100 in minimum reserves—20% of the $500 deposit—against this deposit, leaving $400 in excess reserves that can be loaned out. However, since the public wants to hold 50% of the loan in currency, only $400 × 0.5 = $200 of the loan will be deposited in round 2 from the loan granted in round 1.)
Round
Deposits
Required reserves
Excess reserves
Loans
Loan proceeds held as currency
Loan proceeds deposited
1
$500.00
$100.00
$400.00
$400.00
$200.00
$200.00
2
$200.00
3
4
5
6
7
8
9
10
totals
Round
Deposits
Required reserves
Excess reserves
Loans
Loan proceeds held as currency
Loan proceeds deposited
1
$500.00
$100.00
$400.00
$400.00
$200.00
$200.00
2
$200.00
3
4
5
6
7
8
9
10
totals
Explanation / Answer
2 200 40 160 160 80 80 3 80 16 64 64 32 32 4 32 Take deposit amount subtract 20% required reserve (multiply 0.2 by deposit to determine the reserve). This gives you the excess reserve and loan amount. Then multiply by 50% (0.5) to find amount held as currency (M1).
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.