Question

b) Banks are required to have specie equal to 10% of the currency they have in circulation, Assume banks hold no excess reserves. Banks have $1000 in specie. What is the volume of bank notes in circulation? Are notes full bodied or partial backed?

d) True or false and explain: If bank's expectations cause them to reduce lending there will be an unanticipated increase in the money supply.

e) Suppose banks have a 10% reserve requirement and hold no excess reserves. Banks have $1500 in reserves and the non-bank private sector holds $500 in currency. What is the total money supply? What happens to the total money supply if the non-bank private sector deposit $200 of their currency into the banking system?

Answer 1

Answer b)

If specie is 10% of the currency and banks have $1000 in specie then the volume of bank notes in circulation will be $1000*1/10%=$1000*100/10=$10,000.

Notes are not full bodied because their commercial value or intrinsic value is not equal to their face value. They are partially backed by gold.

Answer d)

False

If lending would be reduced then there will be more of reserves and less money in the market and hence less money supply.

Answer e)

Non-Bank private sector is not required to hold cash reserves so, currency with them is not concerned with money supply.

Banks hold $1500 in reserves and reserve requirement is 10% then amount of deposits=$1500*1/10%=$15,000 and the money in circulation=$15000*1/10%=$150,000.

If Non bank private sector will deposit $200 in bank then bank will keep $20 as reserve and will lend $180. This will generate money supply of $200*1/10%=$2000. So, total money supply will become $152,000.